Although both the Conservative and Labour Party have pledged not to raise taxes, a thinktank has warned about the £800-a-year tax hike hiding in plain sight. Also, the Resolution Foundation has noted how the measures announced by both parties will raise the total tax take by £23 billion a year by the Tax Year 2028/29.
Why are Tax Increase Expected?
Even though tax rates may not directly increase, tax burdens on UK households may increase in other ways, such as the ones outlined below:
1. The Fiscal Drag
The process of freezing existing tax thresholds so that more people are pulled into the higher rate tax band is known as fiscal drag. The Income Tax thresholds have been frozen since 2022 and are expected to remain frozen until April 2028.
This means that as wages rise with inflation, more people will find themselves in a higher tax bracket. So, despite the nominal tax rates staying constant, the tax burden on households will grow, pulling more earners into the higher tax brackets.
2. Reversal of Temporary Tax Cuts
Another factor that could potentially increase taxes after the general election is the reversal of temporary tax cuts. The temporary reduction in business rates, fuel duty, and stamp duty land tax are set to end. This reversion will add financial strain on households and businesses.
What Does this Mean for UK Households?
According to the Resolution Foundation, the Treasury is raising funds at a historic high due to an increase in corporate tax revenue and taxes on higher earners. Taxpayers paying a higher 40% tax rate has increased from one in 10 in 2010 to one in six in 2023, which is almost 3 million people. The organisation’s analysis was published days after Prime Minister Rishi Sunak’s claim about the Labour Party’s supposed intention to put up household taxes by £2,000. Labour leader Sir Keir Starmer has refuted this claim.
While higher earners will face increased tax rates, some middle-income earners have seen relief from cuts in National Insurance Contributions (NICs). The NI rate decreased from 10 % to 8% from 6 April 2024. However, history tells us that tax rises often come after general elections, says a principal economist at the Resolution Foundation.
Conclusion
The general election, set for July 2024, has sparked quite a debate about the tax rises in the UK. Although the Conservatives and the Labour Party have denied any plans to raise taxes, experts claim that a tax rise is inevitable no matter who wins the vote.
Even though the nominal tax rates stay the same, tax burdens on households and businesses may rise through other means, such as tax freezes and reversal of temporary cuts. So, the landscape of taxes in the UK is uncertain, with the potential for increased tax burdens over the coming years.
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