RUTH SUNDERLAND: How YOU are funding the bill for Rishi Sunak’s big spend
The Tories are meant to be the natural party of middle class values: thrift, enterprise, low taxes and a small state.
Rishi Sunak has wandered a very long way from those principles.
The reality he faces is that the size of the public sector has swollen to nearly half the total economy. Not only that, but taxes are rising to their highest level in relation to national income since the 1950s.
But the full scale of the tax raid on the middle classes was not immediately apparent when Rishi delivered his Budget. Stealthy measures, some announced previously, were overshadowed by cheery tax cuts on beer and prosecco and the Chancellor’s tone was breezily optimistic.
The sobering truth, however, is that Middle Britain will be able to afford far less of its favourite fizz because Rishi is purloining billions from their pay-packets, pensions, investments and inheritances.
The reality Rishi Sunak faces is that the size of the public sector has swollen to nearly half the total economy. Not only that, but taxes are rising to their highest level in relation to national income since the 1950s (Stock image)
Rishi is purloining billions from Middle Britain’s pay-packets, pensions, investments and inheritances (Stock Image)
£85bn NI grab
The so-called health and social care levy was unveiled a month ago but the full damage is only spelled out on page 133 of the Budget Red Book.
Previously, it was thought the 1.25p in the pound hike in National Insurance from April 2022, would cost employees, some pensioners and investors a total of £12billion a year. In reality, it turns out that Rishi is filching more than £16billion a year from our pockets, rising to nearly £18billion in tax year 2026/7.
In total, he will squeeze more than £85billion over six years out of long-suffering taxpayers before rebates. A middle-class professional on £50,000 a year will pay an extra £505 and someone on £80,000 will pay an additional £880.
£3bn divi damage
Tax on share dividends will also rise by 1.25p in the pound as part of the health and social care levy. This will raise a total of £3.2billion by 2026/7 for the Exchequer at the expense of savers, many of whom rely on dividends to fund their retirement. Fortunately Rishi left untouched the tax-free allowance of £2,000 a year on dividend income.
But he froze the maximum tax-free limit of £20,000 a year for ISA subscriptions which will yield £50million for government coffers by 2026/7, to the detriment of small savers and investors. The Treasury will also snatch another £65million in extra taxes on profits from the sales of property, shares and other assets, by freezing the capital gains tax allowance.
£19bn Big Freeze
Rishi pledged not to increase income tax rates but he has found other ways of extracting more out of pay packets.
One sneaky but highly effective method is ‘fiscal drag’, which simply means not raising tax-free allowances or higher rate thresholds in line with inflation. As a result, people pay more tax, and the real spending power of their salaries dwindles.
The so-called health and social care levy was unveiled a month ago but the full damage is only spelled out on page 133 of the Budget Red Book (Stock Image)
In his April Budget, Rishi froze for five years the tax-free personal allowance for income tax at £12,570 until April 2026.
He is also fixing the threshold at which people start to pay higher rate tax at £50,270, over the same time frame. This will cost Britons a total of more than £19billion by 2025/6.
The effects of ‘fiscal drag’ are particularly worrying at the moment, when economists fear inflation is about to take off. The more it does so, the more the tax freeze will hurt.
Another way this cunning move wrings out more tax is by pulling more people into higher rate tax brackets.
In 1990, only 1.7million people or 4per cent of the working population paid higher rate tax at 40per cent. That has risen to 4.6milllion now.
The costs to pensioners of the controversial decision to break the state pension ‘triple lock’ have been laid bare in the Budget papers (Stock Image)
By the end of the current Parliament, nearly 6million of us –or 11percent of working age adults – will be on higher rate tax, more than double the number when the Tories came to power in 2010.
Extra death tax
Families hoping to leave a legacy to loved ones have also been affected by the freeze. The ‘nil rate band’ on which no tax is payable has been frozen until April 2026 at £325,000, a level that drags many modest homeowners into the net.
As the value of property goes up – and house prices have risen strongly in the pandemic – more grieving relatives will be hammered by tax on their loved one’s estate.
The Office for Budget Responsibility expects the annual number of estates paying inheritance tax will almost double in the next five years, from 25,400 in 2020-21 to 47,700 by 2026. Thankfully, you can still pass assets on to a husband, wife, or civil partner with no inheritance tax charge.
£30.5bn OAP pain
The costs to pensioners of the controversial decision to break the state pension ‘triple lock’ have been laid bare in the Budget papers.
The lock – under which state pensions had to rise every year by whatever figure is greatest out of consumer price inflation, wage inflation or 2.5per cent – has been suspended, supposedly temporarily.
This was because the rate of wage increases was distorted by Covid-19 effects and was running at around 8per cent.
Suspending the lock will save the Treasury around £30.5billion over five years, but will deprive pensioners of income many can ill-afford to lose.