Analysing The Political Economy

The Quiet Tory Party Attack On The Middle Classes

By The Economic Times Editor:  The chief political correspondent at The Telegraph reported a year ago that Conservative Prime Ministers have pushed through more than one thousand tax rises – a rate of roughly one every three days from 2001 to 2021. The vast majority of these rises are not announced on budget days but hidden in the reams of text within them, which is why it might surprise you to know just that one fact. The middle classes are now under siege by a Conservative government.

Another is that by the time this year is over, the state, under a Conservative government, will have significantly increased the national debt (pandemic debt not included) from 62.4 per cent of GDP to 94 per cent – and raised taxes to that of just after the Second World War when the national debt then was over 250 per cent.

The burden of all these taxes is overwhelmingly put upon the middle classes – especially the upper half of that group. And, it will be of no surprise to know that taxes have not significantly increased (if at all) on the very rich, let alone large companies or transnational corporations that operate in the UK. This is due to personal tax status (such as non-doms), using sophisticated tax accountants, tax havens and all manner of tax-dodging tools available to those that can afford them. And although HMRC will concede the tax gap (the difference between the amount of tax that should be paid to HMRC and what is actually paid) to be in the region of £35bn, it is calculated by Tax Justice UK to be more like £120bn.

Contrary to Rishi Sunak’s constant statements about being a low-tax chancellor, or for that matter the Conservative party in general – the financial lifeblood from those that rarely openly complain and never protest is being drained. As a demographic, they are an easy target.

For those in the traditional professional classes – doctors, lawyers, surveyors, accountants and so on, the tool being used to extract wealth is about freezing thresholds – and chancellors over the last two decades have used them with great effect. But now, mid-ranking managerial and skilled earners in the middle class are also being targeted.  As salaries increase more and more people are being dragged into higher tax brackets.

Quite possibly the most cynical of these tax traps – is how much the taxman allows you to give a child when they get married. The £5,000 you can give to a child on marriage free of inheritance tax has been in the deep freeze since 1975. Had it risen in line with inflation, it would now be worth £51,530.

Inheritance tax is the same. The amount you can pass on tax-free to anyone other than a spouse or civil partner has now remained at £325,000 since 2009 (when the Tories promised to raise the threshold to £1million). If the threshold had increased in line with inflation it would now be £430,000. If that threshold had been in line with house price inflation it would be much greater still.

Child benefit is used as a tax collection tool as well. Had it been increased in line with inflation, the taper that starts removing it for higher earners would only start once a person in the household earned £60,100.

These actions by the government is nothing more than a fiscal sleight of hand and Rishi Sunak has used these tax-grabbing tools more than any predecessor for six decades.


More Tax Traps

The chancellor’s headline announcement was the cut in national insurance — but the amount you pay is set to go up before it goes down and if you earn more than about £41,400 it will rise anyway.

On April 6, the start of the new tax year, national insurance rates went up 1.25 percentage points, thanks to the new health and social care levy. This means that a worker will pay 13.25 per cent instead of 12 per cent of any earnings between £9,568 and £50,270. However, it goes up again on earnings above £50,270 where the present rate of 2 per cent increases to 3.25 per cent.

This means that someone earning £30,000 will pay £151 more a year in tax, and someone earning £60,000 will pay £589 more – not double – but twenty pounds short of 400 per cent of the £151 charge.

The earnings threshold at which workers start paying national insurance has now been raised by £3,000. And although something like 30 million workers will be better off, higher earners making more than £41,389 will not see anything but a higher tax bill because any gains are completely outweighed by the extra being extracted from these wage packs for the social care levy.


The Fiscal Drag Race

The story of fiscal drag on higher incomes keeps on going. The chancellor attempted to soften that blow with a meaningless pledge to reduce the basic rate of income tax from 20p to 19p in 2024. It was presumably designed to make those affected feel better i.e. that the tax rises are short-term and that sunlit uplands are on the way. There was no mention by Sunak to increase the thresholds on all of the new taxes he has imposed by 2024 either.

Fiscal drag is all about inflation. There’s no point bragging about reducing the tax band if the threshold at which you pay it remains constant for decades.

What the Chancellor did not point out was that documents more deeply embedded in the actual Spring Statement also revealed a huge tax windfall for the Treasury over the next few years. Thanks to this freeze on income tax allowances – he is now expecting to collect an extra £7.6 billion in tax.

This is what happens when tax thresholds do not increase in line with pay. You can find that your 2 per cent pay rise is completely wiped out because you have been dragged into a higher tax bracket, whereas if the threshold had moved in line with your pay rise you would have been fine.

Tax thresholds have now been frozen until 2026. And this is in an environment where inflation is likely to reach 9 per cent by this year-end.

Fiscal drag has accounted for a quarter of the jump in income tax and national insurance receipts for this tax year alone, according to the Office for Budget Responsibility (OBR).

The Times reports that – “the pension’s lifetime allowance — has been frozen since 2020, and the £12,300 capital gains tax (CGT) allowance has been frozen since then too. The £20,000 Isa allowance is unchanged since 2017, and the £9,000 Junior Isa allowance since 2020. The amount you can pass on without inheritance tax has been stuck at £325,000 since 2009.

Whilst recognising that there will be little sympathy for those in lower earnings brackets – it is true to say that this now represents an onslaught of tax on those that have done well in life. And what you have read so far, is only the tip of this iceberg.

The tax-free allowance for dividend income has been £2,000 since 2018, and the threshold at which families begin to lose child benefit has been at £50,000 since 2013.

Pensioners are also going to be hit because from next year they will have to pay the social care levy if they have income higher than the national insurance tax-free threshold. It might only be an extra £117 a year, but their inflation raise will only be 3.1 per cent.

For everyone who owns a car – the 5p fuel duty cut won’t stay down for longer than 12 months and documents in Sunak’s statement show he may well increase this tax perhaps by 8p a litre next year to catch up – assuming prices have fallen back a bit by then.

Of course, inflation is the real income killer if wages don’t keep up. The insurer Aviva found that inflation is hitting middle-aged people the hardest, with a rate of 6.33 per cent for the 50 to 64 age group thanks to their high consumption of petrol for commuting and energy for bigger homes. Some may sneer and laugh at such a thing – why shouldn’t the ‘rich’ pay more. First of all the middle classes are not ‘rich.’ And secondly, all those parents with aspirations for their children to do better – striving to make it to the middle classes by way of a university degree – have just been hit with another tax blow. The average payback of a degree now rises from £47,000 to £100,000 because Sunak pushed the payment threshold from 30 to 40 years.

Worse still, student loan interest rates are now set to rise from 1.5% to 9% for low earners from September and from 4.5% to 12% for high earners. So if you’ve got £50,000 of student debt, on average it’ll grow by £2,200-£3,000 in just 6 months.

All these measures are as if the Conservative party despises the middle classes or anyone attempting to get there.


Forget the 1 per cent – it’s the 5 million

About 30 per cent of all income tax revenue to the treasury comes from the top 1 per cent of earners. And whilst there will be no tears for that group, it’s the same as you move through the middle-class tax bands.

The total tax take from those people earning £150,000 and above has doubled to £69bn in the past decade alone. Higher-rate taxpayers (45 per cent) are shouldering more of the fiscal burden than the broader base of basic-rate taxpayers in Britain. Astonishingly – income tax paid by people in the higher rate (40 per cent) bracket has increased by 101 per cent, from £34.5bn in 2010-11 to £69.2bn in 2020-21.

Go back a decade and 1.1m more people ended up paying tax at the higher 40% rate than would have under Labour’s published plans in 2010. In fact, about 5m people pay more tax at 40% than they would have by that criteria.

The Conservative party is no friend to the middle classes – despite what they claim to be and these constant cumulative tax rises, each one seemingly insignificant on their own, add up to a burden that bears no relation at all to any Conservative party ideology since its inception.

Indeed, the shrinking middle-classes are now becoming a point of concern even to the OECD. Three years ago, OECD Secretary-General Angel Gurría said – “Today the middle class looks increasingly like a boat in rocky waters. Governments must listen to people’s concerns and protect and promote middle-class living standards. This will help drive inclusive and sustainable growth and create a more cohesive and stable social fabric.” And yet, this government is attacking this same group with the aggression of a fierce ideologically planted opposition.



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