Politics

UK only major economy hiking taxes on working people during cost-of-living crunch

The UK is the only major world economy to raise taxes on working people in response to the cost-of-living crisis, new research has revealed.

Labour has called on Rishi Sunak to ditch a planned 1.25 per cent hike to National Insurance contributions, set to be introduced next month.

And fresh analysis by the Institute for Fiscal Studies (IFS) revealed that soaring inflation means the chancellor will net a further £12.5 billion from a “stealth tax” hidden in last year’s Budget.

Sunak announced a four-year freeze in income tax thresholds last March, when inflation levels were running around one per cent – raising £8 billion. 

But now the Consumer Price Index (CPI) has soared about five per cent – and could rise as high as eight per cent – which the IFS said amounts to an effective £20.5 billion in additional taxes.

G7 outlier

Tom Waters, a senior research economist for the IFS, said: “Usually tax thresholds go up in line with inflation.

“The tax threshold freeze is now on track to be a £20.5bn tax hike – two and a half times what was originally expected. And this comes on top of the £13bn increase in National Insurance contributions (NICs) slated for next month.

“This episode highlights the danger with setting tax thresholds in nominal terms for long periods of time – unexpected changes in inflation can make the size of a planned tax rise much bigger or smaller than expected.”

Labour said the NICs rise alone is equivalent to 0.5 per cent of GDP in extra taxes, even as houses face rocketing bills of essentials like heating and food.

By contrast, the party said, Germany has tax cuts totalling 0.5 per cent of GDP lined up for 2022, Italy 0.2 per cent and France 0.1 per cent.

Among other G7 countries, Canada and Japan have not announced any personal tax rate increases – while the US anticipates falling tax revenues for 2022.

‘Making it worse’

“There are global factors driving up energy prices and inflation in many countries,” Pat McFadden, Labour’s Treasury spokesperson, told The Independent.

“But what singles out the UK is this government’s decision to impose a tax rise on working people at the same time as energy and food prices are rising.

“Why is the government so determined to make the cost of living crisis worse by pressing ahead with these tax rises now, particularly when the Treasury is constantly briefing that the Tory election grid has pencilled in tax cuts before the next election?”

A Treasury spokesperson said: “The Health and Social Care Levy will provide a necessary, permanent source of funding to support the NHS and fix the social care system.

“We’re providing around £21bn this financial year and next to help families with the cost of living, including targeted support for energy bills, cutting the Universal Credit taper rate to help those on low incomes keep more of what they earn, and freezes to alcohol and fuel duties to keep costs down.

“We are also raising the National Living Wage, meaning that people working full-time will see a £1,000 increase in annual earnings.”

Related: Watch: Gary Neville calls on Johnson to leave his position ‘the second after’ the war in Ukraine is over

Henry Goodwin

Henry is a reporter with a keen interest in politics and current affairs. He read History at the University of Cambridge and has a Masters in Newspaper Journalism from City, University of London. Follow him on Twitter: @HenGoodwin.

Published by
Tags: Rishi Sunak