Although the Autumn Statement on 22 November is not a full budget, and it may not contain huge earth-shattering tax cuts, there are still many commentators calling on Chancellor Jeremy Hunt to do something to help people with the cost of living and in particular to help the poorest and squeezed middle who are being disproportionally affected by the multiple threats of inflation, sky-high energy rocketing food prices, rent and mortgage increases and fiscal drag.
Most experts are not predicting any significant tax cuts this November. The consensus is that the Chancellor will keep his powder dry and hope to be able to announce headline-grabbing tax cuts in a Spring budget. Putting aside this week's story that in order to avoid a ‘Portillo moment’ Hunt may not even get to the next budget, I believe that the Chancellor needs to look at ways to tackle the increasing tax burden on individuals sooner rather than later.
Other news this week showed tax receipts rising by £23.1bn compared to the same period last year, with the bulk of the increase coming from income tax, CGT and NIC’s (£11.5bn), with business taxes (£7.7bn) and VAT (£6.8bn) making up the most of the rest (some receipts fell, including a large drop in stamp duty). Of course, it’s working families and individuals who are paying most of the income tax and national insurance, and they are also paying a lot of the VAT as well.
None of the major parties were promising tax cuts during the recent conference season, but at a time when many working families and individuals are really struggling, the need to do something about the impact of years of fiscal drag seems clear.
Stealth taxes increase the burden
Although Prime Minister Rishi Sunak recently claimed “...the best tax cut we can give people right now is to halve inflation…”, I don’t believe the two should be linked. Inflation is not a tax, even if it leads to higher taxes. In fact, I’d go as far as to say the only way they are linked is that higher inflation and higher taxes as a result of frozen thresholds are both hurting households.
Everyone agrees that cutting inflation is important, even if they don’t agree on how to go about it. But one of the biggest issues for most working families and individuals - the squeezed middle – has been fiscal drag. Years of tax thresholds not rising in line with inflation have seen more people pulled into the higher tax bracket, even when household income is hardly likely to make them feel well off. The IFS recently predicted that frozen thresholds could lead to a record two-thirds of adults paying income tax – and a record one-sixth of adults paying higher rate tax.
Wage inflation has also been called out as an issue by the government. However, average wages have not increased anywhere near in line with inflation over the past few years. A quick glance at all the headlines about ongoing strikes across the public and private sectors will confirm that.
Unfair and complicated rules hit families
An increasing number of parents who would not consider themselves particularly wealthy can be hit by a double whammy of being dragged into the higher income tax band and having to pay the Higher Income Child Benefit Charge (HICBC). This confusing and ill-conceived tax was memorably described as a barnacle tax by our previous tax editor Rebecca Cave.
The HICBC can lead to eye-watering marginal tax rates as high as 87% for parents earning just over £50,000, even if it is only one parent earning. With the threshold not having increased even in line with the higher rate tax bracket, let alone inflation, it can see confused basic rate taxpayers facing charges and penalties for not completing self assessments when they are caught by the charge.
Workers face higher travel costs
In spite of fuel duty being frozen, prices at the pump have still increased dramatically over the past few years. Whilst the horrendous peak of nearly £2 a litre in July 2022 has eased slightly, prices are still over £1.50 a litre and this impacts any household with a petrol or diesel vehicle.
People travelling for work in private vehicles are also the victims of another frozen threshold. The Association of Taxation Technicians (ATT) recently warned that people who use their own cars for business trips are being left out of pocket by “severely outdated” mileage rates. The 45p per mile rate was frozen in 2011 and would now be 63p per mile if it had increased with inflation.
“Freezing mileage rates for the last 12 years means employees are no longer fairly compensated for the real expenses incurred during their business travel. This particularly affects those on low wages, such as care workers, who have no choice but to use their own cars for work," said Senga Prior, chair of the ATT technical steering group. “The current rates are severely outdated, meaning employees are bearing the financial burden of business travel on behalf of their employers.”
It’s not only drivers facing rising prices though. Although most rail fares faced by commuters increased by less than the rate of inflation in March 2023, they still went up by 5.9% and it’s likely that we will see another large increase in 2024. The costs of getting to and from work and of driving your own vehicle on business duty are getting ever higher.
Nothing is certain in life but death and taxes
And finally, to add insult to injury, inheritance tax (IHT) can be another fiscal drag ‘sting in the tail’ for families who may be hoping that an inheritance from a loved one could, one day, ease their financial troubles. More and more estates are being brought into the IHT brackets as the threshold of £325,000 has been frozen since 2021/22.
IHT receipts from April to September 2023 rose 10% year-on-year to £3.9bn. The receipts in June 2023 were the highest monthly total on record which the government said could be due to possible effects from the recent rise in interest rates that HMRC is obliged to charge on overdue tax bills following the recent increases in the Bank of England base rate.
Regardless of the reason, the unexpected windfall will be welcome news to the Treasury, but will it make them inclined to change anything when, overall, the nation's finances are still in such a perilous state?
Around one in 25 estates currently pay IHT, but with the thresholds frozen and house prices having risen so much over the past decade, even more estates will fall into the IHT trap. This will likely mean that more people who would not consider themselves wealthy will need to get expert advice to avoid falling foul of IHT.
Will the Chancellor deliver any early Christmas presents?
It’s unlikely that this year’s Autumn Statement will have much early Christmas cheer for most households. Other than Kwarteng’s abortive attempt just 12 months ago, none of the last five Chancellors have managed to bring down the tax burden.
It’s likely the Chancellor will want to hold back major tax changes until the Spring Budget to boost the government's election chances. I hope that rather than the kind of tax cuts that Kwarteng proposed, but was prevented from actually delivering by the markets, any changes actually benefit lower-income households. Rather than the richest 10% getting tax cuts, perhaps the Chancellor could consider those households who would benefit from addressing the unfairness of the HICBC, business mileage rates, and the families pushed into paying tax, or the higher rate tax bracket by the frozen tax thresholds.
I’m not going to hold my breath, but I’ll be keeping my fingers crossed that he delivers a welcome surprise that benefits as many of us as possible.
