With two chancellors effectively at the helm, the fall statement was always going to be a trying one. But have they really targeted the pain on those with “the broadest shoulders” – or just those who are easiest to lean on?
By increasing benefits in line with inflation and extending cost-of-living assistance for the poorest, Jeremy Hunt has delivered on his promises to protect the most vulnerable.
However, as inflation drives up wages, workers will pay tens of billions of pounds in stealth taxes to fill the bulk of the fiscal black hole as the freeze on income tax thresholds is extended until in 2028.
Of course, there have been token tax hikes for the ‘wealthy’ – including the reduction of Capital Gains Tax (CGT) allowances and the lowering of the 45p tax threshold from £150,000 to £125,140 from next April.
This means someone currently earning £150,000 will pay an additional £1,243 in income tax per year. But the same increase applies to someone earning over £1million.
Anyone seriously wealthy will be relieved that the Chancellor failed to bring CGT rates in line with income tax, which would have cost them far more than simply withdrawing £6,300 of the tax-free annual abatement.
The reduction in dividend allocations will squeeze investors and directors of limited companies a bit more, but, again, dividend tax rates remain below equivalent income tax rates.
In fact, rather than imposing wealth taxes on the wealthiest, the fall statement’s use of stealth taxes will tighten the tight middle even further.
But the concept of wealth is relative. Six months into the pandemic, an FT survey found half of readers backed a single wealth tax to shore up public finances. The much harder question was who should pay for it – invariably the answer was “people who are a bit better off than me”.
Applying this caveat, you might think that people with salaries in the high five figures and low six figures have nothing to worry about. Admittedly, compared to the impact on the most modest, the cost of living crisis is far from being so brutal.
Still, soaring rents and childcare costs are putting a stranglehold on the finances of a growing group of relatively wealthy young professionals.
The shortage of private rental properties in London has pushed average monthly rents to a record high of £2,100 this week, according to estate agent Hamptons. Across the UK, in general, rents are rising at their fastest pace since the financial crisis.
If 9% of your paycheck is already earmarked for student loan repayment, it will be even harder.
Parents, however, have the most to fear from frozen tax thresholds. Childcare costs are also at record highs, with childcare fees paid by the wealthiest parents subsidizing huge gaps in the government’s funding model.
But if a parent’s income exceeds £100,000, the family immediately loses thousands of pounds of hours of ‘free’ childcare and tax-free childcare.
Then there is the £50,000 threshold at which Child Benefit begins to be phased out. Introduced in 2013, this would now start at £63,000 had it increased with inflation. The Institute for Fiscal Studies estimates another 700,000 families will lose all or part of their benefits by 2028.
And even if you don’t have children or rent property, anyone earning between £100,000 and £125,140 will know that the 45p rate is not the highest tax rate.
On this income bracket, the removal of the personal allowance is equivalent to a marginal tax rate of 60% – a quirk of the system that most people only discover when a tax bill arrives.
This clawback system was introduced in 2010 when the personal allowance was about half of its current amount. Over the years, the allowance has risen to £12,570, further removing the lowest earners from paying tax, but widening the range to 60% at the top.
Arguably the Chancellor missed an opportunity to simplify the tax system by lowering the 45p threshold to £100,000 and in return removing the clumsy clawback mechanism, which would at least save six-figure earners the hassle of completing annual tax returns.
Claer Barrett is the FT’s consumer editor and author of ‘What They Don’t Tell You About Money’. firstname.lastname@example.org; Twitter and Instagram: @Claerb
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