Millions hit by Chancellor Kwasi Kwarteng’s £46bn stealth tax

Nine million low- and middle-income people will be hit by a £46 billion ‘stealth tax’ after the chancellor fails to reverse a draconian four-year freeze on tax brackets.

Kwasi Kwarteng portrayed his package as a tax-reducing mini-budget, but persevered with a bombing of the tax bill sneaked in by his predecessor Rishi Sunak.

The extra money raised by the freeze will eclipse the cuts in base and higher tax rates.

In a little-noted measure in the Sunak budget last March, the amount at which people start paying taxes was frozen at the 2021/22 level of £12,570.

Sunak set the threshold for the 40 per cent rate at £50,271. Both thresholds will remain the same until the 2025/26 tax year. The move was announced before prices started to rise and would initially cost taxpayers £8bn. But the real costs have skyrocketed as a result of escalating inflation, which is currently close to 10 percent.

Research conducted exclusively for The Mail on Sunday by the Center for Economics and Business Research (CEBR) predicts that nearly five million lower-paid workers who currently pay no income tax will be dragged into the net over the next four years. Another 3.8 million taxpayers will be pulled into the 40 percent band as wages rise.

The CEBR thinks the changes will bring in an additional £46bn in revenue. Kwarteng could have dropped the freeze, but chose not to.

It means the proceeds from the frozen allowances will offset the chancellor’s giveaways and have provoked accusations of robbing Peter to pay Paul. “The chancellor is largely bribing us with our own money,” said CEBR Vice President Doug McWilliams.

The increased tax deduction due to the freezing of personal deductions and thresholds is known as a ‘tax impediment’. “It’s a stealth tax,” said independent economist Julian Jessop. “I don’t like it, it makes me uncomfortable and it’s better to index allowances properly.”

Tax brackets are designed to rise with prices to ensure that no one pays more taxes simply because of inflation.

Kwarteng’s tax returns to households and businesses – totaling around £45 billion – were delivered alongside an energy price cap that will cost £60 billion in six months if prices remain high.

Financial markets were already nervous that tax cuts would weaken the country’s finances as the specter of a recession looms. Kwarteng’s announcements terrified investors and led to a sharp sell-off in stocks and bonds. In addition, there was further hammering on a weak sterling.

Kwarteng dropped the planned increase in national insurance contributions and canceled an expected increase in corporate income tax. Most controversial of all, he abolished the 45 per cent tax rate on those paid more than £150,000 a year. The basic income tax rate will be reduced from 20 percent to 19 percent from April.

Public sector net debt is already high at £2.4 trillion, just below the UK’s entire annual output. But the sneaky tax revenues will ease the strain on public finances, giving Kwarteng some breathing room.

The stealth tax has largely gone under the radar and there has been no debate in Parliament that it will cost taxpayers much more than initially claimed. The CEBR estimated the bill at £40 billion earlier this year. The latest forecast is based on the most recent government data. Financial markets believe that interest rates will have to stay high for longer if the Bank of England is to curb inflation. The cost of borrowing is expected to hit 4 percent by the end of the year and are expected to peak at 5.5 percent next summer. Last week, the Bank of England raised interest rates by 0.5 percentage point to 2.25 percent, the highest level since 2008.

Some analysts speculate that the Bank will need to step in beyond its monthly decision-making cycle to calm markets, restore confidence and support the pound.

George Saravelos, Global Head of Foreign Exchange Research at Deutsche Bank, said: “The policy response needed to what is going on is clear: a major rate hike from the Bank of England this week to regain credibility with the market.”