Written by Kunal Sawhney, CEO, Kalkine

Amid soaring inflationary pressure, millions of Britons’ cost of living woes are going to amplify with the proposed £40 billion stealth tax imposed by chancellor Rishi Sunak in his last year’s budget. The measure, which was overlooked and not noticed at the time, has now become a threat for more than nine million Brits who are being pushed towards higher tax bands during these rough times.

Freeze on allowances and inflation surge

A four-year freeze was imposed by Rishi Sunak on the income tax thresholds, starting from April 2022 to March 2026, for which he is facing backlash now. According to the latest figures released by the Centre for Economics and Business Research (CEBR), the freeze would compel over nine million workers to pay higher taxes. The abandonment of the four-year freeze is thus being demanded from Sunak, and he is being pressured to raise the income tax thresholds in accordance with the inflation levels.

Over the coming four years, around 5 million workers who belong to the lower-income category are all set to enter the tax bracket, as per the CEBR analysis. These workers, who are currently not paying any taxes, would have to give up 20% of their income, which would further squeeze their budget. In the meantime, about four million additional Brits would potentially be pulled into the tax band with a 40% higher rate.

This stealth tax blow has come when Britons are already burdened with high inflation, surging energy costs, and a 1.25% National Insurance (NI) hike. Consumer price inflation has hit its 30-year high, touching 5.5% recently, though, the freeze was imposed by Sunak before this. The budget of the households is facing double the burden now due to allowances being frozen amid rising prices accompanied by rising tax bills.

Workers earning over £12,570 per year pay a basic rate of tax at 20%, while on incomes of over £50,271 and £150,000, 40% and 45% tax is levied, respectively. By 2026, five million additional workers would be paying the basic rate, while the number of taxpayers paying the higher rate would double up to 8 million.  Based on this, the Treasury would potentially receive additional tax payments worth over £40 billion due to the wage hikes, as per CEBR.

Inflation has made a case for the reversal of stealth tax hike

The £40 billion stealth tax rise seems to be highly unfair towards households, especially the poor ones, who are struggling to meet their basic needs amid the cost-of-living squeeze. Rising energy cost, which is a major contributor to high inflation levels in the UK at present, is already pushing households towards fuel poverty. It is unjust to push households to pay higher taxes when they are still trying to cope with the existing issues that they have been facing through the pandemic phase.

There has hardly been an uproar against Sunak’s move made in March last year, however, it is anticipated that the move may prove out to be substantially more distressing because of the skyrocketing inflation. The 1.25% hike in NI contributions very well concealed Sunak’s announcement regarding the freeze on income tax thresholds; however, several economists have said that the freeze could potentially burden the households more than the rise in NI contributions. If this is true, then the stealth tax hike would not be a judicious move.