Chancellor Sunak has increased taxation from income, which will alienate Conservative middle-class voters. Problem? No way. Adroit political footwork and the magic of inflation will square the political circle.
Quietly, without fanfare, and with deadly efficiency Sunak created additional income tax revenue out of thin air. He announced the changes in 2021 a year before they began. They’ll erode wages over the next four years, for very large numbers of taxpayers without attracting political damage. Genius!
Sunak’s stealthy tax rises are forecast to bring an extra £1.55 billion into the Treasury, 2022-3. How? Thresholds are expressed in cash terms and inflation shifts the dial. Billions of pounds of additional taxation will be generated by fiscal drift. There’ll be a gentle upward shift between taxation bands. (See Addendum) This will be more-or-less imperceptible unless you pay close attention to salary statements. Even then, you’re helpless without a creative cooperative employer.
Income increases in periods of inflation. The forecasted take from freezing the tax band thresholds is huge.2 The first tranche, £1.55 billion, is dwarfed in subsequent tax years. Sunak’s 2021 Budget wasn’t predicated on 7% inflation. That 30 year high inflation rate makes his predictions an underestimate.3 Britain’s government has a large debt burden and Sunak has embraced inflation. His policies will stoke inflationary pressures, accelerating debt reduction.
Sunak’s (underestimated) calculations for the freezing of tax thresholds
2022-3 £1.55 billion; 2023-4 £3.655 billion; 2024-5 £5.79 billion; 2025-6 £8.18 billion.1
Sunak’s new ‘normal’ tax rate is 40% for many middle-class employees as they breach the £50,270 higher tax rate level.3
In a stroke of political skullduggery, Sunak announced an income tax cut in his 2022 Budget speech.4 This begins in 2024. (2024 is, coincidently, a General Election year.) By then millions of Conservative voting middle-classes will be paying 40% income tax. Sunak’s strategy is to rely on the short-termism that dominates British politics. His tax reduction will capture headlines, not the tax rises of the previous two years. Those rises will have been subsumed into acceptable normality, unlike the tax cut.
Sunak’s sleight of hand has set the agenda for the next election. He will sincerely and truthfully say he’s a tax cutting Chancellor. Obviously, he’s committing a Sin of Omission5 but it’s adroit politics and he isn’t a Catholic. His political juggling is masterful and it’s disappointing that he’s unlikely to found out. This tax ‘rise’ is in a class on its own.
Addendum: Moving into the 40% tax band
Inflation is currently (April 2022) 7%.6 The price-wage link is well established and many middle-class people earning £45,000 can expect to be paying 40% income tax by 2026. They’ll suffer a double whammy by losing tax-free Child Benefit. Sunak’s Treasury therefore achieves two benefits from freezing thresholds. (1) Fiscal drift brings more middle-class employees into the 40% tax bracket and (2) The Treasury pays out fewer benefits as the middle-classes lose their entitlement to tax-free Child Benefit. The middle-classes will suffer from the cost-of-living crisis during an inflationary period taking a significant hit to their standards of living.
1 Income Tax Personal Allowance and the basic rate limit from 6 April 2022 to 5 April 2026 – GOV.UK (www.gov.uk) and also Income Tax rates and Personal Allowances : Current rates and allowances – GOV.UK (www.gov.uk)
2 April 2022 inflation is running at an annual rate of 7.2% Wage increases are about 5% and aren’t keeping up with inflation AWE: Whole Economy Year on Year Three Month Average Growth (%): Seasonally Adjusted Total Pay Excluding Arrears – Office for National Statistics (ons.gov.uk) For the numbers of people in each of the tax brackets see Summary Statistics – GOV.UK (www.gov.uk)
3 Someone earning £45,000 in 2022 can expect, with normal wage drift, to be on £54,700 by 2026 bringing them into the 40% higher rate tax bracket. That is a doubling of their tax liability on the additional salary.
6 Consumer price inflation, UK – Office for National Statistics For a forecast of inflation and a discussion of inflationary pressures see UK inflation hits 7%: how high could inflation rise in 2022? | The Week UK