Households will lose £2 in stealth freezes for every £1 in Truss tax cuts, says IFS

For every pound households receive through Liz Truss’s headline cuts to tax, twice as much will be taken away in “stealthy freezes”, a leading economic think tank has warned.

The figures come even before millions are predicted to suffer a hike in mortgage payments as a result of Kwasi Kwarteng’s disastrous mini-Budget.

Earlier this week Ms Truss was forced by her own MPs to dump one part of the Budget, plans to axe the 45p tax rate, paid by those who earn more than £150,000.

But the fiscal plan 10 days ago still includes a number of major tax cuts, including reductions in national insurance contributions and 1p off the basic tax rate.

However, these come during what is a four-year freeze to income tax thresholds. Many other tax and benefit thresholds and values are also frozen indefinitely, the IFS warned.

Just the four-year freeze to the personal allowance alone means that by 2025-26 an extra 1.4 million people will be paying income tax, a total of 35.4 million, or two in every three adults.

The same freeze on the higher-rate threshold also means that by the same time an extra 1.6 million will be paying that, a record total of 7.7 million people.

Following the 45p U-turn there will be three times as many additional-rate taxpayers as when it was introduced – 760,000 instead of 240,000.

The research is part of the IFS’s “Green Budget” set to be unveiled later this week.

The IFS also pointed to areas of the benefits system where freezes were hurting ordinary people.

Around half a million families are projected to lose some or all of their child benefit entitlement by 2025-26, because the £50,000 threshold at which it starts to be tapered away has been frozen since 2013.

Tom Wernham, the author of the report, said: “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.”

The analysis focused on changes in benefits and taxes on personal incomes and did not incorporate recently announced cuts to corporation tax or stamp duty.

The IFS also only considered changes to the tax and benefits system set to still be in place in 2025-26, and did not incorporate the energy price guarantee, one-off cost-of-living grants or the 5p cut in fuel duty.

Tom Waters, a senior research economist at the IFS and another author of the report, said: “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.”

Alex Beer, welfare programme head at the Nuffield Foundation, said: “Frozen tax and benefit thresholds do not account for changes in the cost of living and as a result can fail to reflect household needs.

“One example is the benefit cap, where the threshold freeze dramatically increases the numbers of families subject to the cap and reduces the amount of real support the benefit system offers.

“Evidence shows that parents currently subject to the cap struggle to meet their children’s basic needs, and that it increases maternal mental ill-health and risks affecting children’s emotional and physical development.”