Sunak’s tax hikes could deepen UK living costs, experts warn

Tax hikes and skyrocketing bills will be the biggest shock to household incomes in nearly half a century, and there is a risk that the UK’s fragile economic recovery may be thrown off course, experts warn.

A person who earns £30,000 will see their net wages fall by £1,660 thanks to a rising cost of living, stagnant wages and tax hikes, according to new calculations from the Institute for Fiscal Studies (IFS).

The effective wage cut includes paying £250 more in national insurance contributions and £150 more in income tax. Poorer households, which spend a higher proportion of their income on essentials such as energy, will be hit even harder as hundreds of thousands are expected to fall into fuel poverty. Someone who earns £15,000 a year will get a knock of £860 on his real after-tax income, the IFS calculated.

It means that households are now facing the largest sustained decline in their disposable income since the 1970s.

Citizens Advice warned people were being forced to make “desperate decisions” between eating or heating their homes. “With the hefty blow of further price hikes in April, things will go from bad to worse,” said the organization’s chief policy officer, Morgan Wild.

Budgets are expected to be affected by a 50 percent rise in energy bills in April when a revised price cap is enforced, while households with cheaper fixed rates will see their bills double.

£1,660

Reduction in home wages for someone making £30,000 a year

An alarming spike in gas and electricity costs, coupled with global supply chain disruption, is pushing prices for many goods up, with inflation expected to rise above 6 percent.

It comes at the same time as an increase in National Insurance Contributions (NICs) and the start of an £11 billion tax raid by Rishi Sunak.

The government has been accused of exacerbating the cost of living by introducing ill-designed tax hikes when inflation rises and wages stagnate.

Economists warned that Mr Sunak’s desire to “balance the books” by raising taxes while the economy is weak could stifle the UK’s fragile recovery, which in turn would lead to lower tax revenues.

“There is a real risk that poorly designed tax increases coupled with lower economic growth will prove to be a dangerous combination for both the country’s household budgets and finances,” said George Dibb, head of the IPPR’s Center for Economic Justice.

“The UK faces a lingering cost of living, with incomes likely to be hit even harder than the 2008 financial crash. If this proves to be the case, you’ll have to look back to the 1970s to see a bigger shock to households’ real disposable income.”

A five-year income tax freeze announced by Rishi Sunak in October means 1.5 million people on low incomes are expected to be covered by the basic income tax rate and 1.2 million people will be dragged to the higher rate. . Higher inflation means people will pay £4 billion more in income tax in 2026 than the Treasury had forecast, according to a new analysis from the IFS.

Tax hikes will reduce household income and consumer demand, slowing economic growth, said IFS deputy director Carl Emmerson.

“The fact that inflation is much higher than expected last March also means that the tax deduction freeze will bite harder.”

1.2 million

More low earners will pay income tax from this year

Living standards are further eroded by runaway house price inflation, fueled in part by a cut in stamp duties last year. Despite a subdued economy, average house prices in the UK rose 9.8% in 2021, making owning a home less affordable for those not yet on the ladder.

The dire data set means less money for households to spend, less revenue for businesses recovering from the pandemic and potentially lower tax revenues for the government.

The chancellor faces mounting pressure from Tory backseats and campaigners to reverse his planned tax hikes, but he has so far held out, insisting that this is the only responsible way to pay for health and social care.

Households already approached the current crisis in a financially vulnerable position by 13 years with no real increase in average income, says Frank van Lerven of the New Economics Foundation.

According to the NEF, some 21.4 million people live below a socially acceptable standard of living. The think tank expects real wages to return to 2008 levels only by the end of 2028.

2028

The year in which average real earnings are expected to recover to the peak of 2008

Mr Van Lerven said: “A multitude of different dynamics will affect households all at once – a new coronavirus wave, falling real wages and massive increases in energy prices.

“In addition, we have still not recovered from the previous crisis and we are still dealing with the consequences of leaving the European Union.”

The NEF advocates, among other things, a reduced energy ceiling for people with a low income, an extension of the warm housing discount so that it applies to more people and an increase in child benefit.

Talks between government and energy suppliers have not yet led to an agreement on how to reduce the impact of rising bills.

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