Million will stay in higher tax bands unless economy improves by March

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt have both signalled more tax cuts are coming (Photo by Ian Forsyth / POOL / AFP)

The public finances will not allow Chancellor Jeremy Hunt to use the spring Budget to cut a stealth tax that is dragging millions into paying higher rates, i has been told.

Rishi Sunak over the weekend made clear the Government wanted to cut taxes further in the upcoming spring Budget, insisting last week’s autumn statement which shaved 2p of national insurance was “the start of a journey”.

It has sparked speculation that the Prime Minister and Mr Hunt could seek an early end to the freeze on personal tax thresholds, which is pulling millions into paying higher rates as earnings rise.

The so-called stealth tax is due to last until 2028 but the Mail on Sunday reported that it could be scrapped in the Budget or included as a commitment in the Conservatives’ manifesto for the next election, which is expected next year.

The 2p national insurance cut being scheduled for January and the suggestion that it could be followed by more giveaways in spring has meanwhile sparked speculation Mr Sunak could plump for an early election, potentially in May.

But the Sunday Times reported that two of the Prime Minister’s closest advisers – No 10 chief of staff Liam Booth-Smith and Tory election campaign director Isaac Levido – were cautioning against a snap poll.

Meanwhile a Treasury insider said there was no space in the so-called “headroom” outlined in the autumn statement – the amount by which the Government can boost spending or cut taxes without breaking its fiscal rule to get debt falling within five years – to unfreeze thresholds.

Mr Hunt and his officials do not plan to even discuss the contents of the spring Budget for several weeks.

But the insider cautioned that currently “there isn’t room” to unfreeze thresholds, suggesting there would have to be a significant improvement in the public finances if the Chancellor wanted to make the move in spring.

The insider also warned there remained a “risk” that unfreezing the thresholds could fuel inflation, which was last week forecast to remain higher for longer.

Despite Mr Hunt cutting employee national insurance contributions by 2 per cent for 27m people alongside other changes, the overall tax burden will still rise every year to a “post-war high of 37.7 per cent of GDP by 2028-29”, the Office for Budget Responsibility (OBR) said in its forecast alongside the autumn statement last week.

This is largely driven by so-called “fiscal drag”, which will pull more people into higher tax brackets as thresholds for different rates have been frozen at a time of high inflation and high earnings growth.

Overall, frozen income tax thresholds will drag four million more workers into paying income tax over the next five years, three million more workers into paying the higher 40p rate, and 400,000 into paying the top 45p rate.

This fiscal drag effect will be worth a massive £44.6bn in extra cash for the public finances and many Tory MPs have called for it to end.

An additional four million people have started paying tax since 2020, the HMRC reported in June, with 1.6m dragged into the higher 40 per cent band.

On Sunday, Chief Secretary to the Treasury Laura Trott refused to comment on whether there would be tax cuts in the Budget.

“But what I would say is that we have set a direction of travel to grow the economy, to support businesses and to reward work, and we want to bring that tax burden down over time in a responsible way,” she told Sunday Morning with Trevor Phillips on Sky News.