‘Tax by stealth’
A report by the Intergenerational Foundation (IF) has made claims that the government’s manifesto promise to ‘not raise taxes’ has directly led to tax by stealth for under 30s in the UK.
The report has found that the freeze to tax brackets, student loan repayments, and the National Insurance contributions (NIC) increase is going to hit young workers the hardest. Furthermore, the report goes on to accuse the government of burdening the cost of social care and the aftereffects of the pandemic on young people, as they are going to pay a rate of 13.5% with the national insurance increase.
In contrast, those who reach the state retirement age of 65 do not pay national insurance even when they continue working. However, they will pay the social care levy at 1.25% from next year.
How will young workers be impacted?
The report states that during a time of high inflation, currently at a rate of 5.4%, the decision to freeze the tax brackets will force young people into higher tax brackets much sooner than expected.
The government have also taken the decision to freeze the student loan repayment threshold at £27,295 for the next year. This is expected to generate an additional £600m for the Treasury.
However, IF have warned that if the government extends the freeze, then the impact on graduates earning between £20,000 and £30,000 will be ‘serious.’ This is because 1% of their income will be taken as a ‘graduate tax.’ The IF said this action by the government will ‘deliberately raise the financial burden on young people and graduates.’
The report further states that the hits to young people’s income are going to keep coming in the form of the 54% rise in household energy bills, due to come into effect in April of this year. These rises mean that a graduate living in a one-bedroom flat could see their energy bills rise by a considerable £395.16.
Argus Hanton, co-founder of the Intergenerational Foundation, made the following comments:
‘These decisions are really going to bite and will hit young people harder than older generations, partly because they’ve got less margins of safety. But also, largely because the government is taxing earned income so heavily and unearned income so lightly. After all they have sacrificed to protect older generations during the pandemic, lower-earning younger generations will be forced to shoulder the cost of government promises to increase social care spending and reduce Covid-19 debt, when both spending decisions were made to protect older generations.’
What could be done to help?
The IF report claims that these issues could be avoided if tax brackets rose with inflation. This should still increase the tax the Treasury receives but would also protect low to medium-income workers.
The report also suggests that there is little reason to keep the current ‘regressive structure’ of the NIC system and that the Treasury should scrap the exemption for workers aged over 65 as it would increase tax income by £1.5bn annually. IF also highlighted the possible option of charging national insurance on landlord and dividend income, as they calculated this would raise an additional £24bn a year.
In response to IF’s report, a Treasury spokesperson said the following:
‘We recognise the pressures people are facing with the cost of living and are providing support worth around £20bn this financial year and next to help.’
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