Rishi Sunak has announced the highest tax increases since Norman Lamont 28 years ago, with a £65bn raid on household incomes and company profits.
In a budget that reversed more than a decade of tax cuts by successive Tory governments and was even tougher than George Osborne’s post 2010-election austerity package, the chancellor announced tough action to reduce government borrowing.
Sunak said he needed to freeze allowances on incomes and pension pots from next year to balance the books, in a move that will mean millions paying more tax.
The increase in corporation tax from 19% to 25% in 2023 would mark the first attack on company profits since the Labour chancellor Denis Healey raised corporation tax in 1974 in the wake of the three-day week.
Sunak said the shift to higher corporate taxes was fair because it would only hit those companies that had done well through the pandemic.
The Labour leader, Sir Keir Starmer, said: “It’s right that corporation tax isn’t rising this year or next. Of course, in the long run corporation tax should go up.
“The decade-long corporation tax experiment by this government has failed. But no taxes should have been raised in the teeth of this economic crisis.”
Starmer said a £2bn council tax rise from April that will add 5% to annual bills was another increase that the government should scrap.
Chris Sanger, the head of tax policy at EY, described the budget as “three years of support, followed by three years (and more) of pain”.
Sanger added that the chancellor will hope that the recovery in tax receipts is stronger and spending lower, so he can abandon the planned tax increases.
“Time [is] the chancellor’s friend in his aim of replenishing the government’s coffers.”
The decision to freeze personal income tax allowances from April 2022 until 2026 “represents a clear tax rise for all taxpayers over the coming years,” said the accountants Blick Rothenberg.
Sunak said in his speech that he was not hiding the changes, adding: “I am here, explaining it to the House, and it is in the budget document in black and white.”
The moves mean the chancellor can argue he has stuck to the 2019 Conservative manifesto pledge of no increases to rates of income tax, national insurance or VAT, and he said of the move to freeze personal tax thresholds: “Nobody’s take-home pay will be less than it is now as a result of this policy.”
Under the rules, the first £12,500 of an individual’s income is free of tax, and this is called the personal allowance. Income between £12,500 and £50,000 is taxed at 20%, while above that, each additional pound of income is taxed at 40%, up to earnings of £150,000, when the rate goes up to 45%.
Normally the thresholds would be expected to rise by at least inflation, but the government has said the personal allowance will rise as planned to £12,570 from April this year and then stay frozen at that level until April 2026. Similarly, the £50,000 higher-rate threshold will rise to £50,270 from April and then stay there until spring 2026.
The Treasury’s budget documents show that these two moves will cost taxpayers more than £8bn a year by 2025-26.
The Institute for Fiscal Studies played down the significance of the tax rise, saying the personal allowance had risen by almost 60% in real terms over the past decade, reducing income tax revenue by “an eye-watering £25bn a year”.
It meant that 40% of adults do not pay any income tax. “The planned freeze, representing a 7% real-terms cut, undoes only a small share of that rise, and brings another 1.3 million people into the income tax system,” the tax and spending watchdog said.
But Laith Khalaf, a financial analyst at the investment firm AJ Bell, said that freezing these allowances “will collectively cost taxpayers £19bn over the next five years. It will slowly but surely mean that from 2022, millions of people will pay more income tax, without the government actually adjusting the headline rate.”
Sarah Coles, a personal finance analyst at the investment firm Hargreaves Lansdown, said it was a “relatively stealthy way” to suck many hundreds of thousands of people into paying income tax, and then hundreds of thousands more into paying the higher rate.
The chancellor also decided to freeze the pensions “lifetime allowance” at its current level of £1,073,100 until April 2026, when it would normally increase every year in line with inflation. An individual will usually pay tax if their pension pot is worth more than the lifetime allowance. Freezing it for five years will raise an estimated total of £1bn for the Treasury.
If an individual’s pension fund is worth more than the allowance, the government will tax everything above that amount at 55% if they take it as a lump sum, or 25% if they take the money another way.
PIMFA, a trade association for wealth management and investment firms, said freezing the allowance until 2026 “penalises pension savers looking to secure their future and, in the most extreme cases, sees people left with no choice but to give up work”.
The government also froze until 2026 the thresholds for inheritance tax and the annual exempt amount for capital gains tax, which it was predicted would together raise a further £1bn.