Freezing tax thresholds could raise £6bn a year – while protecting lower-income households that have borne brunt of Covid crisis

Freezing the personal tax allowance at £12,500, and the higher rate threshold at £50,000, for the remainder of the parliament would raise £6bn a year by 2024-25, while protecting lower-income households that have been hardest hit by the crisis, the Resolution Foundation says today.

With the Chancellor set to signal his commitment to balancing the books after a crisis that has sent borrowing up towards £400bn – and the national debt to its highest level since the second world war – the Foundation’s analysis shows that freezing tax thresholds would pass three critical tests that any tax rises announced in the Budget should meet.

The Foundation says that any tax rises announced in the Budget should:

  1. Protect families hardest hit by the crisis. With around 80 per cent of the revenues raised from freezing tax thresholds coming from the richest fifth of households, lower-income households would be largely spared significant tax rises. Across the bottom 40 per cent of households, the average tax rise by the end of the parliament would be less than £100 a year. And a typical earner on £25,00 would see their tax bills rise by just £12.50 a month. Progressive tax rises are critical, says the Foundation, given that lower-earners and lower-income households have borne the brunt of the current economic crisis. Recent RF analysis found that the poorest fifth of households were two-and-a-half more likely to have seen their family balance sheets deteriorate rather than improve over the course of the crisis. In contrast, the richest fifth of households were one-and-a-half times more likely to see their balance sheets improve rather than deteriorate.
  2. Avoid holding back Britain’s economic recovery. The revenues raised from a four-year freeze to tax thresholds would build up over the course of the parliament, rather than rise sharply at the start of the tax year. This would mean that the bulk of the revenues raised would come in the second half of the parliament, once the economic recovery from Covid-19 has been secured.
  3. Raise significant revenues. Freezing tax thresholds would raise £6bn a year by 2024-25, a significant contribution to the post-crisis fiscal consolidation that will be required. Even delaying the start of the freeze till next year would raise similar revenues, as low inflation means tax thresholds are not due to rise by much this year anyway.

The policy would also avoid breaking the letter, if not the spirit, of the ‘Tax Triple Lock’ in the 2019 Conservative Manifesto of not raising income tax, National Insurance or VAT rates.

The Foundation adds that a staggered increase in corporation tax, from its current rate of 19 per cent to 22 per cent by the end of the parliament, would also pass these three tests and raise £10bn a year by 2024-25.

Finally, the Foundation says that while the Chancellor may feel the need to announce tax rises to demonstrate his commitment to repairing the public finances, he faces a far more pressing task in helping to secure Britain’s economic recovery from the pandemic.

To do this, the Foundation says he should combine a £30bn extension of emergency Covid support (in line with the pace of the PM’s roadmap to recovery) with a £70bn stimulus package that includes further job support, and an innovative £9bn Voucher scheme – worth £150 per adult, and £75 per child – to help Britain’s battered high streets.

Mike Brewer, Chief Economist at the Resolution Foundation, said: “The most urgent task facing the Chancellor in his Budget is to secure Britain’s economic recovery and prevent a major rise in unemployment once the furlough scheme ends.

“But once the recovery has been secured, tax rises will be needed to repair the public finances, and the Chancellor may want to signal his intent to do that next week.

“Freezing tax thresholds and announcing a staggered increase in corporation tax would have the triple benefit of raising around £16bn a year by 2025, while also protecting families that have been hit hardest by the crisis, and not holding back the recovery.

“The Chancellor’s strategy will ultimately be judged on whether he’s done enough to get Britain out of the current crisis, and got the public finances in shape in time to fight the next crisis that comes along.”