£1,000 stealth tax burden will punish the middle classes, says expert, as households will feel pain’

Middle-class earners will be hit by a £1,000 stealth tax attack next year, experts have warned in a gloomy review of the budget.

All households are facing “lingering pain” amid a “lost decade for living standards” as they are hammered by high prices and low wage growth, the Institute of Fiscal Studies (IFS) said.

Poor official forecasts suggest that the next two years will be the “worst on record” for household income, despite hopes for medium-term economic growth.

Government spending plans will be tighter than previously thought as more money goes to defense and childcare and Jeremy Hunt expects to find more money for public sector rewards.

Paul Johnson, director of the research institute, said yesterday: ‘What households will feel over the next year will be lingering pain. Inflation may be falling, but prices remain much higher than they were two years ago. The income has not been caught up.’

The stealth tax raid will raise £120bn for the Treasury over the next five years by placing a further six million people in higher brackets, in a process known as fiscal drag.

The IFS calculated that if the salary threshold at which workers start paying the 40p rate of income tax – currently £50,270 – had risen in line with inflation since 2010, it would now be £56,680 and rise to £62,410 next month.

Mr Johnson warned: ‘The freeze on income tax and national insurance contributions, allowances and thresholds will cost most base rate taxpayers £500 next year and most higher rate payers £1,000 next year.’

He also pointed to figures from the Office for Budget Responsibility (OBR) predicting a massive drop in people’s purchasing power.

The independent forecaster said household income would fall by 6 percent this year and next — slightly less than the 7 percent feared last year, but still the biggest drop since records began in the 1950s.

Mr Johnson said: ‘The OBR may be relatively bullish on the medium term, but still thinks this will be the worst two years on record for household incomes.

The projections suggest that by 2027 real disposable household income will be no higher than in 2019 and barely higher than in 2017 – a lost decade for living standards. The OBR’s optimism about the economy may not be widely shared just yet.’

Shadow Chancellor Rachel Reeves also criticized the growth of stealth taxes yesterday. She told MPs: ‘The government has, to be honest, given us some growth. Growth in stealth taxes, growth in mortgage costs and growth in NHS waiting lists. But there’s no plan for the future, just a Tory legacy of pain.”

In another stark analysis of a “disastrous decade for living standards,” the Resolution Foundation think tank said median household disposable income would be £1,800 higher in 2027-2028 if it had remained at its pre-pandemic growth rate.

It added that over five years each household will pay an additional £4,200 in tax compared to the 2019-2020 figure, despite most Whitehall wards facing 10 per cent cuts in their budgets.

Chief executive Torsten Bell said: ‘If we take a step back, the UK’s underlying challenges will remain largely unchanged.

‘We invest too little and grow too slowly. The standard of living of our citizens is stagnating. We ask them to pay higher taxes while cutting public services. No budget could turn that around, but it was about time Britain did.’

Asked about the secret tax raid, the Prime Minister’s official spokesman said: “Part of this conversation illustrates that the government is trying to strike a balance. There are comments that we are risk averse, comments that we take too many risks.

“We are supporting households with the cost of living and investing in industries and infrastructure to grow the economy, so we need to strike the right balance to deleverage and restore public finances, especially given the hundreds of billions of pounds lost during covid are provided. ‘