UK households are losing more than they are gaining from tax cuts in Kwarteng

Stealth freezes on tax and benefit thresholds will cost UK households twice as much money as they could benefit from the government’s interest rate cuts, the Institute for Fiscal Studies said on Thursday.

Liz Truss stuck to her tax-cut strategy at this week’s Conservative Party Conference, arguing that it was imperative to kick-start the economy to higher growth – even as she was forced to abandon her most conspicuous measure, scrapping the 45p top rate the income tax. Along with the Prime Minister, Chancellor Kwasi Kmachen insisted the Tories would “deliver lower taxes for you and your family”.

But the IFS analysis showed that even after Kwarteng reversed his predecessor’s increase in Social Security contributions and accelerated the 1p cut in the property tax rate, people across all parts of the income distribution would lose more than they gained.

“Freezes far outweigh headlines. . . and they will draw millions more into the tax system and higher tax rates,” said Tom Waters, senior research economist at IFS.

“Giving with one hand and taking with the other is in this way opaque and stealthy – and when inflation is volatile, the impact can vary significantly from what the government originally intended,” he added.

A four-year freeze on the £12,570 tax-free allowance means the number of income taxpayers will increase by 1.4million to 35.4million – two-thirds of adults – by 2025-26. Over the same period, a freeze on the higher interest rate threshold will increase the number of 40p interest rates by 1.6m to 7.7m – the highest on record.

Meanwhile, the £150,000 threshold at which people start paying the maximum rate of 45p has been frozen since it was launched in 2010 – and by 2025-26 the number of people it has caught will have tripled since its launch have, from 240,000 to 760,000.

These freezes will reduce household income by an average of £1,250 by 2025-26, the IFS said. Many households will also be affected by a freeze on the thresholds above which certain benefits will be withdrawn. After factoring in these and other planned welfare system changes, households will lose an average of £1,450 a year by 2025-26 – which will add £41bn to the Treasury.

That’s double the £20billion cost the Treasury of Kwarteng’s high-profile cuts to personal tax rates – although the IFS stressed the cuts would weigh heavily on public finances compared to previous plans.

The combined effect of changes in overall tax rates, the introduction of guidelines and the freeze will hit the poorest households hardest, the IFS said. That means Kwarteng’s tax plans remain highly regressive even if the government doesn’t impose any further real cuts in welfare when next year’s revaluation takes place.

Because some freezes are indefinite — particularly those of benefits — the impact is increasing over time, with the 10th-highest income households seeing a 1.3 percent drop in income through 2030-31 and the poorest tenth seeing a 4.7 percent drop in income have to.