Thursday 4 March 2021 10:20 am

Budget secures £21.7bn in stealth taxes for Treasury coffers

The Chancellor has made use of fiscal drag to secure £21.7bn in steal taxes by the end of the 2025/26 tax year.

Fiscal drag is a phenomenon where inflation gradually moves more taxpayers into higher tax brackets. Some commentators describe it as the ultimate steal tax.  

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In yesterday’s budget Chancellor Rishi Sunak chose to freeze thresholds in most of the major classes of tax – VAT, inheritance tax, capital gains tax and the pensions lifetime allowance – until 2026.

“It’s a much less controversial way of raising tax than changing the actual tax rate. However, the taxpayer, especially in areas like income tax, will feel the pinch in real terms,” said Jason Collins, head of tax at law firm Pinsent Masons.

Collins, who made the calculation, said the £21.7bn figure included £8bn in extra income tax.

As inflation rises, the effect of tax threshold freezes becomes more lucrative for the Treasury and more punishing for savers and investors.

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Over the next four years, 1.3 million people will be brought into the tax system because the freeze on the tax-free threshold, and a further one million people will be pushed into higher tax bands by 2025-26.

Boring Money CEO Holly MacKay said the Chancellor dropped a “bombshell” of a tax list, which would punish retirement investors, those with assets invested outside a tax wrapper, and those who pass on investments and assets in their estate.

“Over time this will mount up to many billions in extra tax revenue, which the Chancellor emphasises is the price we must pay for the pandemic response,” she added.

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Anthony Morrow, co-founder of online financial advice service OpenMoney, said the change would affect “ordinary” people, not just the wealthy.

“Although the Chancellor left income tax unchanged, by freezing the personal tax thresholds many more people will be pushed into paying more tax by stealth as wages rise through inflation, reducing the amount of money they take home and giving them less to spend and save each month. The same is true for the freezing of the inheritance tax and capital gains tax thresholds and the pensions lifetime allowance.

“Although the Chancellor stated he was asking more from “those who can afford to contribute”, depending on how long the starting thresholds for these taxes remain frozen, they will impact not just the wealthy, but ‘ordinary’ earners too,” he added.

Speaking in Westminster yesterday Sunak said he would do “whatever it takes to support the British people and businesses through this moment of crisis”.