Middle income families face paying ‘£3,000’ more in tax after Rishi Sunak’s Budget

28 October 2021, 13:13 | Updated: 28 October 2021, 17:06

The Institute for Fiscal Studies has warned the Budget is likely to leave middle earners worse off next year.

Analysis by the independent think-tank says the combination of higher inflation and rising taxes will put more pressure on living standards.

IFS director Paul Johnson says the pandemic has been used as "cover" for a necessary rise in spending.

He warned the story of Wednesday's Budget was of "spending increases and a worrying outlook for living standards".

The Institute for Fiscal Studies said middle-earners would lose an average of £180 per year.

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And the Resolution Foundation warned middle-income households, those earning around £30,000 a year, would take a large hit to pay for investment decisions in the wake of the Covid pandemic.

"Higher taxes will largely fall on middle-and higher-income households," the think tank said.

Families will pay an extra £3,000 in taxes during the course of Boris Johnson's premiership at a time of low growth and stagnating wages, but Downing Street is disputing this figure.

No10 said the figure is "not a fair reflection" of the fiscal situation.

A Treasury spokesman said: “It's misleading to imply that households will immediately face a £3,000 tax hit because this figure appears to include business and employers taxes which aren't applicable directly to households.

“The same report shows that the government's policies are set to boost incomes for those at the bottom of the distribution, and that higher taxes will mostly impact middle-to-higher income households.

“This government’s decisions have been worth nearly £500 per year extra to households on average, and more than £1,000 for the poorest households – and that’s before factoring in wage growth, including the rise in the National Living Wage.”

The shadow chancellor said the Resolution Foundation's analysis was "staggering".

Rachel Reeves said: "Revelations from yesterday's Budget that taxes will be £3,000 more per household than when Boris Johnson became Prime Minister are staggering.

"This is a Budget hammering working people while giving bank a tax cut.

"The Tories have no plan to tackle the cost-of-living crisis, no plan to shift the unfair taxes they've hit working people with and no plan for growth.

"This was an out-of-touch, high-tax, low-growth Budget from a Conservative Government that would rather waste billions of pounds of taxpayer cash than give households a VAT cut on their heating bills heading into winter."

Mr Sunak insists his plans are the fairest way to emerge from the coronavirus crisis.

The Chancellor insisted to MPs that it is his ambition to bring taxes down by the next election, but the IFS director warned of the challenges while trying to fulfil the demands of public services that have suffered a decade of cuts.

In opening remarks at a post-Budget event in central London, Paul Johnson said of Mr Sunak: "If he is to achieve the ambition he set out at the end of his speech to get taxes down and reduce the size of the state, then he is going to have to come up with some pretty new and radical ways to manage those pressures.

"He would be helped by an economy growing rather more enthusiastically than it has managed for some time now.

"Finding the key either to reforming public services to make them cheaper and more efficient, or to getting higher economic growth, are challenges which have defeated most of his predecessors."

Mr Johnson said if the current forecasts are correct then the Chancellor could be in line for a pre-election giveaway of "perhaps £7 billion and still maintain some fiscal headroom".

"But, given his newly stated fiscal targets, it's not a huge or comfortable cushion," he added.

He warned that despite the Chancellor's upbeat claim that it was a Budget to "usher in a new age of optimism", voters "may not get much feelgood factor" with high inflation, rising taxes and poor growth "undermined more by Brexit than by the pandemic".

He said these factors will see living standards "barely rising and, for many, falling over the next year".

Despite the "real and substantial" rises in public spending, the IFS said that finances in many areas will be "substantially less" in 2024/25 than back in 2010, highlighting spending per student in further education and sixth form colleges as one area where levels will be "well below".

"This is not a set of priorities which looks consistent with long-term growth - or indeed levelling up," Mr Johnson said.

With the possibility of inflation hitting the highest level in three decades, he warned that "millions will be worse off in the short term".

Mr Johnson said welfare payments will rise by around 3%, while inflation could be 5%.

"That will be a real - if temporary - hit of hundreds of pounds a year for many benefit recipients," the director added.

"We are not at 1970s levels of inflation but we are now experiencing enough inflation that real pain will be felt as low-income households - most of whom have little in the way of financial assets - wait more than a year for their incomes to catch up.

"For some in work that may never happen."