Keeping the government’s tax cut commitments on track means the Chancellor finding £2bn over next two years

Published on Public Finances and the Economy

The Chancellor will need to find £2bn over the next two years to keep the government’s income tax cut pledges on track – with a £300m down payment needed this April – and with 85 per cent of the windfall going to the richest half of households, new analysis from the Resolution Foundation will show.

The government has committed to raising the personal tax allowance (PTA) to £12,500 and the Higher Rate Tax threshold (HRT) to £50,000 by the end of the parliament.

However the HRT has already fallen behind the trajectory required to take it to £50,000 in even-sized steps and would need to rise by £930 this year – at a net cost of £300m – to get back on course. Despite often being described as a tax cut for middle earners, less than one in seven employees would benefit from such a move. As a result, over three-quarters of this tax windfall would go to the richest fifth of households.

The Foundation notes that half of the individual cash gains will also be clawed back by an equivalent increase in the National Insurance upper earnings limit, bringing the overall gain down to £93 per taxpayer. This is because when people become higher rate taxpayers the income tax rate they pay increases, but the National Insurance rate actually falls from 12 per cent to 2 per cent.

The cost of keeping the tax cut commitments on track will rise to £2bn next year, with further ratcheting up of both the Personal Tax Allowance and the Higher Rate Threshold needed. While changes to the PTA would benefit basic rate as well as higher rate taxpayers, the Foundation notes that around 85 per cent of the gains from these tax cuts would go to the richest half of households. 4.6 million low-paid workers will gain nothing at all from these cuts because they do not earn enough to pay tax. It adds that low-income families on Universal Credit will have two-thirds of any tax cut clawed back through reduced benefit entitlement.

The Foundation says that supporting low income working families, including by overturning cuts to Work Allowances in Universal Credit, should be a higher priority than regressive income tax cuts, particularly with the OBR set to update its forecasts to take account of what the Chancellor has called a “dangerous cocktail” of negative economic news in recent months.

It adds should the Chancellor want to cut taxes in the Budget, increasing the National Insurance threshold would be more cost-effective and better targeted because it only affects the working age population and would also help 1.3m who do not earn enough to pay tax but still pay NI contributions.

Torsten Bell, Director of the Resolution Foundation, said:

“With the Chancellor’s planned pension reforms on hold for now, much of the pre-Budget talk has shifted towards the income tax cuts the Chancellor has previously committed to. Whereas the former was set to transfer government support from higher earners to those lower down the distribution, it is higher income households who stand to gain most from the latter.

“Keeping on track with those commitments would mean finding £2 billion pounds over the next two years and would overwhelmingly benefit richer households at a time when support for poorer working families is being withdrawn.

“The priority next week should be supporting low and middle income working families, instead of going down this route of expensive and poorly targeted tax cuts.”