Rishi Sunak’s ‘stealth tax’ to generate £12.5bn extra cash – ‘Unexpected changes’

Pensions are at 'highest level in three decades' says Sunak

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The Chancellor had originally been expected to bring in £8billion by stopping to the point that people start paying a higher tax rate in line with prices. However, rising inflation as a result of easing Covid restrictions, global instability and the Russian invasion of Ukraine have pushed that amount to £23billion.

Tom Waters, a senior research economist at The Institute for Fiscal Studies that conducted the research, said it highlighted the danger of inflexible tax thresholds.

He said: “Usually tax thresholds go up in line with inflation.

“Last March, when the Chancellor announced a four-year freeze in income tax thresholds, inflation was fairly low and so he expected it to raise about £8billion per year.

“Since then, inflation has risen rapidly and is expected to rise even further, peaking at more than 8 percent.

“That means that the tax threshold freeze is now on track to be a £20.5billion tax hike – two and a half times what was originally expected.

“This episode highlights the danger with setting tax thresholds in nominal terms for long periods of time – unexpected changes in inflation can make the size of a planned tax rise much bigger or smaller than expected.”

It comes as Tory MPs have been lobbying for months both publicly and privately for the increase in national insurance due next month to be delayed or scrapped due to the cost-of-living crisis.

However, Mr Sunak and Prime Minister Boris Johnson have dismissed these calls arguing that the rise is needed to help pay for the £12billion a year needed to clear the NHS backlogs. 

On Wednesday, it emerged that the £12.5billion extra from income tax would cover the cost of dealing with these backlogs should the national insurance rise be cancelled.

National insurance will rise by 1.25 percentage points in April, taking the tax burden to its highest point in 70 years.

Since it was agreed last autumn, a cost-of-living crisis has emerged due to rising prices, energy bills and petrol prices.

A spokesman for The Treasury said that the increase in national insurance would help the NHS and social care sector. 

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He said: “The Health and Social Care Levy will provide a necessary, permanent source of funding to support the NHS and fix the social care system.

“The levy is progressive and fair with those earning more paying more, meaning the highest earning 15 per cent will pay over half the revenues.

“We’re also providing around £21
billion this financial year and next to help families and businesses with the cost of living.”

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