Jeremy Hunt is facing increasing pressure to reduce taxes in the autumn statement, as there is proof that nearly 4 million workers in the UK will now be required to pay income tax for the very first time.
During a crucial week for the government, Rishi Sunak hinted on Monday that he may announce personal tax reductions in his speech to the Commons. He stated that the government has made strides in the economy and can now focus on the future.
According to research from the poverty charity Joseph Rowntree Foundation (JRF), the government plans to freeze income tax thresholds, resulting in 3.9 million workers being required to pay income tax by the mid-2020s. This information was shared with the Guardian.
Highlighting the significance of the “stealth tax” in the midst of rising living expenses, the study revealed that up to two-thirds of those affected come from the lower-income half of households in the UK.
Sunak initially introduced the income tax freeze two years ago while serving as chancellor, with the goal of reducing budget expenses. Hunt later extended it during last year’s autumn statement until 2027-28, and it has been hailed as the most significant revenue-generating action in over 40 years.
Instead of increasing with inflation like normal, keeping tax thresholds at a fixed amount causes more people to be subject to higher income tax rates when they earn more money.
On Monday, Sunak announced the next phase of his economic strategy and revealed five new priorities for his administration, which includes reducing taxes and acknowledging diligent effort.
“At a low-key speech in north London, he stated that our persistence has paid off as inflation has been reduced by half, allowing us to focus on creating the economy we desire.”
As our growth has become more robust, resulting in increased revenues, we are now able to shift our focus towards reducing taxes in the next stage.
“We will approach this task with a serious and responsible attitude. However, we cannot accomplish everything simultaneously. It will require discipline and prioritization. But eventually, we are capable and determined to lower taxes.”
Other potential measures have been reported this week, with the BBC saying VAT on period pants – reusable absorbent underwear – will be removed and the Times reporting that planned changes to benefits could mean people with mobility and mental health conditions are told to apply for jobs that allow them to work from home.
Sunak’s remarks raised hopes among Tory MPs that he would honour his pledge to reduce the 20p basic rate of income tax, even if just by 1p.
Last summer, during the competition for leadership of the Conservative party, he stated his goal to decrease the rate to 16p by the end of the following parliamentary term. However, while serving as chancellor, he implemented a strategy to increase revenue from households through a tactic referred to as “fiscal drag” by economists.
The Office for Budget Responsibility, which predicts economic trends for the Treasury, stated in March that the number of taxpayers is projected to increase to 38.2 million by the end of the freeze. This is approximately 3.2 million higher than if the policy was not implemented.
Despite initial predictions by the Treasury that the policy would generate £8bn over a span of four years, the Joseph Rowntree Foundation (JRF) has reported that due to inflation remaining at a higher rate than anticipated, the number of individuals affected by income tax will increase to 3.9 million. This means that the six-year freeze on income tax is now projected to raise approximately £54bn by 2027-28.
Despite the fact that this policy will result in lower income households being subject to income tax, it will have a much larger effect on those with higher incomes. According to the JRF, the top 10% wealthiest families will pay an estimated total of £13.3 billion, which is more than the combined amount paid by the bottom 50% (£13 billion).
According to Peter Matejic, the primary analyst at JRF, the government has exceeded its revenue expectations by billions of pounds. This surplus could potentially be allocated towards improving benefits for low-income households or investing in public services.
He stated that it is crucial for the chancellor to utilize all possible means to ensure that everyone can afford basic necessities and avoid going hungry or cold in a country like ours.
Based on research conducted by the Institute for Fiscal Studies (IFS), the freeze will result in a decrease of £135 for employees earning the “national living wage” of approximately £19,000 annually this year. This decrease is projected to increase to £637 per year by 2027-28.
In addition to the increasing cost of living, the report stated that the typical employee’s net pay was projected to have only increased by 0.3% since the beginning of the Covid outbreak, and by a mere 1.6% by the midpoint of the 2020s.
The IFS anticipates that the implementation of this policy will result in a significant increase in the number of workers who fall into higher tax brackets. This includes 25% of teachers and 12.5% of nurses. Based on their calculations, an individual earning £60,000 will experience a decrease in income by £814 this year, with an expected annual decrease of £1,944 over the course of the six-year freeze.
As Hunt considers potential solutions for generating revenue, he is examining options such as taxing inheritances, income, or providing aid to businesses. This would involve announcing cuts to benefits and increasing the number of people paying income tax, resulting in an increase in earnings for the government.
The chancellor minimized the possibility of significant alterations on Wednesday, stating at a conference held by the CBI lobby group in London that he was unable to fulfill all the requests being made of him.
He stated that now that we have addressed inflation, it’s time to shift our attention to the future growth of the British economy.
The government is facing pressure from Conservative MPs to implement significant tax reductions before the next general election in order to improve the party’s dwindling standing in opinion polls. Government sources have indicated that a reduction in national insurance is more probable than a decrease in the basic tax rate, as the latter could be costly and potentially lead to inflation.
Sunak’s comments on recognizing diligent effort sparked speculation that he may be considering reducing National Insurance contributions for self-employed individuals. Currently, they are subject to a 9% rate on profits between £12,570 and £50,270, and 2% on any earnings above this threshold.
A government official stated that a decision on income tax may be postponed until the spring. It is necessary to have a significant tax proposal before the upcoming election.
Rishi plans to prioritize the economy and will not succumb to a popular tax agenda. Despite pressure from the conservative faction of the party, he remains unafraid.
During his address, Sunak emphasized that the main emphasis would be on the supply side of the economy, indicating that reductions in business taxes are more probable than those for individuals.
Those who work for the government anticipate a declaration about expanding tax breaks for businesses investing in order to improve stagnant economic growth.
Source: theguardian.com
