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Middle earners face £20K stealth tax, says new research

Serious income loss to hit middle earners over the next decade/Photo by Cameron Readius
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Squeezed middle earners are facing a staggering £20,000 stealth tax hike over the next decade, new research commissioned by the Liberal Democrats has revealed.

Income disappearing act

The House of Commons Library analysis shows that someone on a salary of £60,000 will pay an extra £20,440 in income tax over the next ten years due to Jeremy Hunt’s freezing of income tax thresholds. This is equivalent to nearly four months of work going unpaid, or 111 days.

Ed Davey, Leader Liberal Democrats/ Photo Source: Liberal Democrats

The Liberal Democrats accused the Conservatives of betraying Britain’s hard-working middle, warning that families are facing a “lost decade” of tax hikes and soaring inflation.

The research is based on someone earning £60,000 in 2021/22, whose earnings then rise in line with average earnings growth in subsequent years.

“It looks at the additional tax paid compared to if income tax thresholds had increased in line with inflation each year, as they would do if the freeze wasn’t in place,” said a statement from the Liberal Democrats.

In total, the research estimates that the “squeezed middle earner” would pay over £134,000 in income tax over the next decade. It means their income tax bill will be almost a fifth higher (18%) than it would have been if the thresholds had not been frozen.

The figures also show that someone on an average salary of around £33,000 will pay an extra £4,040 in income tax due to the freezing of the personal allowance. This is equivalent to six weeks of unpaid work (42 days).

While families are seeing their taxes hiked, the government is giving £18 billion in tax cuts to the banks over the next five years, through a reduction in the bank levy and surcharge, said the LibDem statement.

“Britain’s squeezed middle is facing a lost decade of unfair tax hikes and soaring inflation. Families are watching aghast as their paycheques fall while mortgage costs soar. Why should the hardworking middle be forced to pick up the bill for the Conservative party crashing the economy? 

Ed Davey, Liberal Democrat Leader

“It is deeply shameful that the Conservative government has chosen to slash taxes for the big banks whilst hiking them for the public,” said Davey. “This could have all been avoided if the Conservative party hadn’t crashed the economy and sent interest rates spiralling with their botched budget,” he said.

In previous years the CEBR forecast that the UK would grow faster than most EU states despite the handicaps resulting from Brexit. However, it reported that “the relatively high tax outlook for the UK now means that its growth is unlikely to exceed most other major European economies, except for demographic reasons.”

How was the income tax hit calculated?

The House of Commons Library calculated the income tax hit by comparing current Government policy with before the March 2021 Budget:

  • Under current government policy, the income tax personal allowance and higher rate threshold are frozen until April 2028. From April 2028 they revert to the default policy, which is annual uprating by CPI inflation.
  • Under the counterfactual policy, all income tax thresholds/ allowances are uprated in each year by CPI inflation.

In all years after 2027/28 (for which we do not have OBR forecasts), the Library assumes that CPI is 2% and earnings grow at 2.7% each year,” the Liberal Democats stated in a report.

“This means that all the relevant thresholds/ allowances grow by 2% per year while earnings grow by 2.7% per year. These figures were used as the Bank of England’s inflation target is 2%; and the earnings growth figure of 2.7% is taken from the final year of the OBR’s forecast (2027-28).”

In the Library’s analysis, the “median earner” refers to a person earning the median wage for a full-time employee in April 2021 and April 2022, which then increases by average earnings. The “£60k earner” refers to someone earning £60,000 in 2021/22, in cash terms, whose earnings then rise in line with forecast average earnings growth in subsequent years.

Average earnings for 2021 and 2022 were drawn from the ONS’s Annual Survey of Hours and Earnings. The average earnings series used to uprate them is “average earnings growth (per cent)” from the OBR’s November 2022 forecast supplementary table 1.6.

All figures in the tables below are adjusted for inflation and are in real 2022/23 prices.

Income loss over the next decade

 Median Earner£60,000 earner
Income over 10 years£351,450£673,540
Avg daily income (over 10 years)£96.29£184.53
Tax paid over 10 years£4,040£20,440
Equivalent days ‘unpaid’42111
Equivalent months ‘unpaid’1.43.7

Cuts to the Bank Levy and Bank Surcharge after 2016 will cost the taxpayer £18bn over the next five years, according to the research.

Public sector receipts from bank taxes (£bn):

 2016-172023-242024-252025-262026-272027-285yr total
Bank Levy3.01.31.21.21.21.26.1
Bank Surcharge1.71.20.90.90.91.04.9
TOTAL4.72.52.12.12.12.211.0
GDP deflator95.0115.7117.2117.8119.2121.4 
Total if 2016-17 levels maintained in real terms 5.75.85.85.96.029.0
Difference -3.2-3.7-3.7-3.8-3.8-18.0
Real-terms cut since 2016-17 56.0%63.5%63.7%64.1%63.1%62.1%

Sources:

2016-17 revenues from ONS, Public sector current receipts

All other data from OBR Economic and fiscal outlook – November 2022 (p.60, Table A.6)

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