For every £1 that UK households receive from cut taxes, another £2 is being taken away, an IFS analysis reveals.
The Institute for Fiscal Studies (IFS) reported last week that UK households will on average be twice as worse off from tax freezes than without them — as a result of how income distributions work. It says that the next four years will lead to more than a £1,400 increase in Tax burdens for basic rate contributors.
The new study came from a collaboration with Citi and had funding from the Nuffield Foundation. Findings were that the combination of frozen benefits, allowances, and thresholds amounted to something like “stealthily and unpredictably” changing how the tax benefit system would be structured and function. The worst effects of this will emerge as inflation increases.
Meanwhile, the Treasury announced increased income taxes of £21bn, despite the announcement by the new government of tax cuts in its mini-budget.
The Treasury’s Imposition
The Treasury will impose £21bn of income taxes despite the new prime minister and chancellor aiming to cut taxes in their new mini-budget. The result of this would effectively be that households pay £1,450 more annually, says the Telegraph.
The IFS says that the headline mini-budget has received a lot of media attention, due to it cutting things like national insurance contributions and the 1p rate to income taxes.
However, even if the additional rate was not removed, public finances would be put under strain due to the size of the tax cuts. The UK is currently in the middle of a freeze on income tax thresholds for four years. The list of freezes includes benefits and other tax thresholds, with these being indefinite at present.
Personal allowances being frozen for four years would mean that, by 2025-26, the number of people paying tax would increase to 35.4 million, which represents 66% of UK adults. This means 1.4 million people paying tax than at present, which is 54 million., Or 63% of adults. The IFS believes that this would strain the basic-rate payer by 2025-26, amounting to £500 more paid annually based on the current strength of the pound and real living wages.
Implications
The report discovered that the four-year freeze of the higher rate threshold would lead to 7.7 million people paying more tax, which represents 40% of adults — which is the largest amount on British record. It would also be a 1.6 million increase on the current figure, which is 6.1 million, or 11% of adults.
When you also factor in the freezing of personal allowances, the frozen higher rate will mean that higher rate taxpayers would pay roughly £3,000 yearly.
The IFS said that the chancellor did not remove the 45p income tax rate, in the end. The £150,000 threshold has been frozen since 2010, but the number of additional rate income taxpayers will be three times as much by the tax year beginning 2026 (relative to how many taxpayers there were when this extra threshold was first introduced — it’s 760,000 compared to 240,000).
The number of families affected by the cap on benefits will also double, to 250,000. And, by the tax year beginning 2026 because of the cap being frozen, 500,000 more families will no longer have all or a portion of child benefit entitlement compared to the present day.
One research economist, Tom Wernham, who works for the IFS and authored the report, said that this is the case of “giving with one hand and taking with the other.” The taxes were viewed as stealthy and nontransparent, and the consequences of these can be unpredictable if inflation increases high enough, deviating from government forecasts and worsening further than they anticipated.
For instance, Wernham said, the unanticipated swell of inflation that the UK is currently facing has led to the freeze on income tax thresholds being about a four times worse tax hike than anticipated when the policy was first released.
Another contributor to the IFS report, Tom Waters, said that the system has been frozen but the government is adding more and more perimeters and this is worrying. To Waters, it seems like a case of “lazy policy-making” and it should be stopped immediately.
UK Business Data — Collapses At Greatest Rate Since 2009
British businesses are collapsing at the fastest rate since the peak of the worldwide financial crisis of 2009. The UK is seeing swelling energy costs and lower demand, with increasing borrowing costs forcing thousands of companies out of business.
For instance, more than 5,600 insolvencies have been reported in England and Wales for Q1 — this is the highest rate since 2009, says figures from the Office for National Statistics (ONS). This increase represents the highest since Q3, 2009.
Insolvencies took a dip in 2020 as a result of government rollouts to sponsor businesses amid the pandemic, says the ONS.
Unfortunately, collapses have surged as firms wrestle with new challenges even after the lockdown ceased. Businesses pointed to startling energy bills as the biggest challenge explaining the spike, but there are also charges with debt, increasing costs for raw materials and severe disruptions in supply chains. In some sense, this is not a deflationary period but a profound shortage of effective manpower.
This capital squeeze has affected all kinds of companies. However, retail, construction and accommodation and food services reported the greatest number of insolvencies for Q1, 2022.
20% of all insolvencies were in construction businesses for Q1, with their industry reporting more than 2,000 cases. Retail and wholesale were the next greatest, representing 14% of instances.
Amid this, 30% of small firms employing between 10 and 49 employees said that energy was also their top concern. Of those in agreement, 22% said that the cost of energy was their chief worry in August, rising from 15% in February, which rose in response to the Russian-Ukrainian conflict and the subsequent impact on gas costs.
Meanwhile, more than 10% of companies said that the risk level of insolvency for August was “moderate to severe.”
The British government has outlined plans to support the public sector and small firms grappling with surging energy costs. However, the scheme will only be available for six months, compared to the 24-month program devised for households.
September Sees Some Returned Growth in Construction
The construction industry hobbled its way back to some growth in September, however business optimism reached a 26-month low as new orders shrunk.
Figures from the S&P Globals Construction Purchasing Managers Index (PMI) showed an unexpected improvement. It was the first increase since June.
The index grew from 49.2 in August to 52.3 in September. But business optimism was at its lowest since 2020 due to shrinking orders, wider industry issues, increased interest rates, and the recession. The activity of homebuilders rose, seeing a five-month high, but commercial work increased much less, with civil engineering falling again.
Part of the reason for this growth was an evening of supply chain shortages, reaching its lowest delays since February 2020.
Takeaway — Energy UK’s Worst Adversary
Survey respondents put energy problems at the centre of the crisis. But also important were problems with materials and supply chains, making it harder to get affordable materials and products in good time.
Once again, the energy crisis has played out in different realms. Although the supply chain softened in September, allowing some increases in construction growth, optimism remains low. The consensus is that any evening will be temporary at best.
John Glenn, the chief economist for the Chartered Institute of Procurement and Supply, points to low sentiment being because the unexpected improvements of September do not overshadow the wider problem: “the devil lies in the details,” says Glenn. The government and Treasury will have to face the enormous pending recession, challenging UK economy, and fundamental energy crisis.
