Liz Truss’s Tax Cuts Set to Cost Millions of Workers More

(Bloomberg) -- Millions more Britons will be dragged into higher rates of income tax over the next three years, costing twice as much as Prime Minister Liz Truss's personal tax cuts, according to calculations by the Institute for Fiscal Studies.

While the government is reducing the basic rate of income tax, it currently plans to maintain the freeze on thresholds where people start paying up to the fiscal year 2025-26. That will push people into higher tax brackets, forcing them to pay more.

The analysis released Thursday is a blow to Truss's argument that tax reductions will boost the economy and put more money back into people's pockets. It also raises questions about how much stimulus the key measure in the government's economic program will deliver, something the Bank of England is watching carefully to determine its monetary policy response.

“Giving with one hand and taking with the other in this way is opaque and stealthy,” said Tom Wernham, a research economist at the IFS. “Of all the changes to taxes and benefits over the next three years, freezes to tax and benefit thresholds are the most significant. Freezes far more than outweigh headline policies.” 

Those earning between £12,571 and £50,720 will see the headline tax rate fall to 19% to 20%, and an increase in national insurance contributions is being reversed. But freezing the level at which tax is paid will have a bigger impact on the earnings of many people, the research group said.

As a result, by 2026 about 1.4 million more workers will be dragged into the basic rate of tax, and 1.6 million will drift into the 40% rate as their pay rises, the IFS calculated. For the 7.7 million people at that point earning over £50,270 and paying 40% on their wages, the freezes “will cost most £3,000 per year.”

The extra cost will only be partly offset by Truss's headline tax cuts. The basic rate reduction will save £377, and the NICs reversal will save someone earning £60,000 a year a further £600. More is saved in NICs the more a person earns.

Overall, “for every £1 given to households through headline cuts to taxes, £2 is being taken away in stealthy freezes,” the IFS said in a report on Thursday.  

Almost every worker will be poorer. “Households in every part of the income distribution will, on average, lose more from freezes over the next three years than they will gain from the headline cuts,” the IFS said.

Truss has pledged to bring the UK tax burden down from 70-year highs. On current plans, however, the tax burden will fall but remain at a 70-year high in part because the threshold freezes more than offset her personal tax giveaways.  

By 2026, 66% of adults will be paying income tax, up from 63% today, and 14% will be in the higher 40% rate, up from 11% today.

The analysis was published in a pre-released chapter of the IFS Green Budget, which is produced in collaboration with Citigroup and with funding from the Nuffield Foundation.

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