The result is, according to the institute, that by 2025–26 these freezes take away £2 for every £1 given to households through the headline personal tax cuts. This affects landlords, tenants and others throughout the population.
Not only is this true overall, but households in every part of the income distribution will, on average, lose more from freezes over the next three years than they will gain from the headline cuts.
Most thresholds, allowances and benefit amounts are usually uprated in line with inflation, or sometimes earnings, so they maintain their real value over time. But freezing them can stealthily and unpredictably change the size and shape of the tax–benefit system, says the IFS.
This is especially true when inflation is high. For example, in the income tax system:
- as a result of the four-year freeze to the personal allowance, by 2025–26 the number of income tax payers will rise to 35.4m (66 per cent of adults) – 1.4m more than the number today (34.0m, 63 per cent of adults). By 2025–26 the freeze will be costing basic-rate taxpayers £500 per year in today’s prices;
- the four-year freeze to the higher-rate threshold means that by 2025–26 7.7m people will be paying higher-rate tax (14 per cent of adults) – this is the highest rate on record, and 1.6m more than the figure today (6.1m, 11 per cent of adults). Together with the freeze to the personal allowance, freezing the higher rate will cost most higher-rate taxpayers around £3,000 per year in today’s prices;
- the Chancellor decided not to abolish the 45p rate of income tax. Because the £150,000 threshold at which this rate starts to bite has been frozen since 2010, by 2025–26 there are projected to be three times as many additional-rate income tax payers as there were when the additional rate was introduced (760,000 versus 240,000);
The IFS says there are also numerous aspects of the benefit system where freezes are biting. For example:
- the number of families affected by the benefit cap – which sets a maximum amount that some out-of-work families can receive – is set to double to a quarter of a million by 2025–26 as a result of the cap being frozen. The last change in the cap was in 2016 (immediately after which only 70,000 households were capped) and on current plans the cap will be frozen indefinitely, meaning it bites more and more each year;
- half a million more families will lose some or all of their child benefit entitlement by 2025–26 compared with now, taking the total to 2.5m (31 per cent of families with children), because the £50,000 threshold at which child benefit begins to be tapered away has been frozen since its introduction in 2013. Back then, it only affected 1m families (13 per cent of those with children). Again, on current plans, this threshold will be frozen indefinitely, withdrawing child benefit from more and more families over time.
Tom Wernham, a research economist at the IFS, says: “Of all the changes to taxes and benefits over the next three years, freezes to various tax and benefit thresholds and allowances are the most significant and least transparent. Freezes far more than outweigh headline policies such as the 1p cut to the basic rate of income tax, or the reversal of the health and social care levy, and they are set to drag millions more into the tax system and into higher rates of tax.
“Giving with one hand and taking with the other in this way is opaque and stealthy – and when inflation is volatile the impact can vary hugely from what the government initially intended. For example, the unexpected bout of inflation we’re now facing means that the freeze to income tax thresholds is around four times as big a tax rise as expected when the policy was announced.”
And another IFS economist, Tom Waters, adds: “Practically every part of the tax and benefit system contains allowances, amounts or thresholds that are frozen, often indefinitely. Some are farcical – the Christmas bonus, paid to pensioners and disability benefit recipients, has been frozen at £10 since 1977, in which time prices have more than quintupled.
“Of course, from the Treasury’s perspective, one can see that undoing such freezes might not be appealing, given the state of the public finances. But that doesn’t change the fact that there are far less opaque and arbitrary ways to raise revenue. Worryingly, it seems like there is a growing trend towards introducing new parameters to the system that are indefinitely frozen. This smacks of lazy policymaking. The government should kick the habit.”
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Well someones got to pay for all this illegal immigration with their 4 star accomodation.
Another pointless government bashing (not that i'm pro government) anti UK drivel. By 26-7 there will have been 3 or 4 more budgets and who knows what changes there will be.
A lot of European countries do not have a personal allowance and pay tax on all their money.
The Government did well with capping energy prices and yes we will have to pay it back somehow.
I hope they get it right and do take us out of recession. I'm not convinced they can and I am utterly appalled how they have messed up the PRS.
But we've had a new leader in Government, whether you agree with it or not, and we need to see what they bring.
I’d have to respectfully disagree. It’s not government bashing to point out that the headline tax cuts don’t amount to much, and producing some genuine data as to how we are in fact facing real terms rises in tax and cuts in allowances. Why allow the government to get away with false claims that they are reducing taxes etc?
Most investors understand very well the power of compound interest and diminishing returns - which is in effect what the government use to stealthily increase our tax bills every year without it looking like an increase.
As for capping energy prices - they have not capped energy prices at all - they are instead taking out huge loans to pay to the energy companies, and those loans will be repayable by us for the foreseeable future - then they present it as a price freeze - it isn’t. Governments have failed to invest in energy infrastructure for the last 30 years - which has caused where we are today. Now they are bringing in a bunch of measures which ultimately amount to more debt for the tax payers - and then having taken all these loans out that are payable by us - they then get to act like they’re being generous. It’s right that journalists and anyone with a voice points these things out and holds them accountable.
Having said all that I do agree, we need to give Liz Truss a chance. She has started out trying to move the party back in the vague direction of conservatism. Ultimately the only thing I think will save the economy is a return to lower taxation, lower public spending, reduced welfare spending - otherwise the economy will continue to chug along like it’s immersed in treacle.
Hi Steve, thank you for your reply and I don't necessarily disagree with your analysis and maybe my choice of words are misleading but i stand with my sentiment of the points I was making.
We cannot blame the government for everything. We can blame them for what they are doing to the PRS, I am shocked how little they understand the effect of their policies.
I compare the UK with Europe. We have all been wrong footed by Putin, but we are in a better position than Europe. The green agenda and concerns over nuclear fuel has caused a lot of problems with investing in fuel in all our countries.
Tax needs to be paid, unfortunately, we all know this. We hope it is done fairly. Section 24 is not fair.
All Government's are subsidised energy, whichever way they have done it, it will need to be paid back.
With regard your analysis on investments. My view is this, if I have a £2 million pound portfolio and my investment goes up by 3% that will dwarf the cost of living crisis which maybe at 12% but as the cost of living may only cost me 12% of £20,000. Overall as an investor I am better off, compared to someone whom is on welfare and that they have not had increases to cover the cost of living and certainly should not be cut further. That is notwithstanding shirkers whom maybe hiding behind welfare benefits, but that is another story.
My analysis might be floored and definitely overly simplified, and my cash flow might be restricted, but my point is clear.
This does not mean I disagree at your analysis it's probably that I view things differently.
All the best to you.
Hi Andy,
Thanks for your reply. I think overall we would agree on far more than we would disagree on. You make a fair point that sometimes 2 different points of view can be both right, but the interpretation and perspective can differ.
I agree that in an inflationary market an investor will do better than someone on benefits. But there’s a huge debate here as to the justice/injustice of this. Yes the rewards are there, but so are the risks. I’d also add, that most portfolio landlords built their portfolios off the back of a lot of self sacrifice. Extra hours worked, holidays forgone, driving old cars, not buying new clothes or dining out often. I have a few properties (not a £2m portfolio) and while many, especially renters, could view me as doing well - even now, you would find most of my tenants are affording things I refuse to spend my money on. So when I do finally have some wealth, I don’t see the injustice - I’ve worked hard and made good decisions. From my perspective, we over-insulate people from the consequences of bad choices which further disables them long term.
Again thanks for your reply - I’m sure we agree on most things and it’s always useful and welcomed to hear different points of view to my own - otherwise I never get to critically think about where my own opinions are wrong or ill informed.
All the best and have a great weekend.
Views excellently put and both valid
It’s not government bashing. What’s going on is that the progressives, the left, call them what you like, have a stranglehold on media, academia, government at all levels and pretty much everything else. They have controlled Tory government policy ever since Cameron was leader, and Labour policy since Blair. They love having a Tory government - they can easily manipulate these idiots into implementing their own policies, then blame the Tories when they go wrong. Nice work if you can get it. What other explanation is there for a travesty like Section 24? But what they hate more than anything is anyone who challenges their agenda. Hence the utter vitriol spewed against Truss and Kwarteng, and the absurdity of blaming a tax cutting budget for these ills when it, on the basis of the most elementary analysis, does not cut tax.
Hi Steve, have just re-read your reply to the thread. Absolutely we will agree on far more than we would necessarily disagree on.
Completely spot on about our sacrifices, and hard work often taking us away from our families and certainly curtailing our spending. Completely agree about insulating people from poor decisions and of course we have the 'I want it NOW brigade'.
We have also been vilified by shelter and other organisations and then of course the media have stuck the boot in which has led to the politicians then trying to fix a problem that does not exist, apart from some rogue Landlords that the current laws seem too weak to properly deal with.
Consequently life as a private Landlord is not so good, especially for those of us with mortgages.
An interesting analysis. I'd rather they raised the thresholds for basic rate and 40%, at least that would reduce the effect of the unfair S24 tax a bit.
Steve Austin, that's very articulate but Johnson surrounded himself with people more stupid than him. Truss is a European lover and a former commie. It shows!
That must've been quite a feat Edwin LOL
If these recent tax cuts will not reduce our tax burden, why did the markets panic?
Now you are asking the right question
Paul. I believe you are right about the media manipulation of private housing housing reporting. We have a London Radio Station continuously bashing private LL’s for years,
if your opinion is different to theirs it don’t get aired, when your messages continuously goes green it’s a good indication in my book.
Legal and general have gone big in building,,have a factory producing pre fabs and have got big contracts for them. Most PRS landlords get their hands dirty and know what happened with system building In the 70s . Prefabs go up quick and come down quick, especially with a naive builder.
They are playing around with a lot of figures here. In simple terms if you earn £100k then £36k is removed in tax & national insurance. When you go over a 100 they take £1 for every £2 over from your personal allowance until it so used up. (62%) so what’s the point of talking about freezing 45% at £150k.
Andy a very learned scholar if I may say so, but why did we walk blindfolded into this war in the first place crossing red lines there was always going to be a reaction a Nuclear power that lost 25 millions in last war and was on our side they were never going to accept NATO moving into Ukraine given that they were being surrounded by prising other Countries out of their grasp. That said Biden & Truss were hell bent on proxy war dragging us all in, what ever we think about Trump I think he would have avoided conflict and more concerned about doing business. Anyone that thinks Nuclear won’t be used is dreaming probably by America first they are not going to be sitting on their hands if they think it’s going to happen. What did you say get over the Recession far smarter to have avoid it in the first place, now we will all suffer the consequences.
You are right in what you are saying, this situation should never have been allowed to happen, but I cannot blame the recent politicians alone, though I will be tempted to finger point at Biden.
The leaders of the world fail to learn from history, and if one thing that can be learned is how war starts. With the drawdown of troops from Germany and the willingness of European countries to tie themselves so closely to Russia in a one sided deal, on energy, was naive to say the least.
Yes I know hindsight is always the best view but our leaders are supposed to be the best of us and surround themselves with think tanks etc etc.
If Trump was still the President I am not so sure that we would be in this position, it would have been one bully against another and I think Putin would have withdrawn his troops as USA would have mobilised under Trump.
For me Boris has been outstanding in his understanding of the situation but was let down by Germany, France and the rest of NATO really. In my view we had to do something, otherwise Putin would have moved onto the next country. Failure to act is seen as weakness. Look at Chamberlin and his famous headline ' peace for our time'.
It is one thing to threaten using a NUKE and altogether different to utilise one, plus it would also depend on the yield of said nuke, or tactical nuke as they are called now.
Ukraine may need to be forced by the West to yield some of their country, if the West does not supply weapons ,then Ukraine will not be so victorious. They have to be persuaded that to continue the fight now could be disastrous for all. Best bide your time for another Russian leader whom could offer a different view. Plus Germany and France are both massively increasing their military budgets in order to be better prepared for the threat that never really went away.
Hopefully we will have The Cold War part two and not WW3!
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