The Autumn Statement's threshold freezes sound trivial. They're not.

The art of taxation, so the old saying goes, lies in plucking the goose to obtain the largest possible amount of feathers with the smallest possible amount of hissing. ‘Stealth taxes’ tend to do a pretty good job on both fronts. 

First to the hissing. Taxes are usually called ‘stealthy’ when they are collected in a way that means people might not realise they are paying them. The Autumn Statement saw the chancellor announce a series of innocuous-sounding “threshold freezes” to income tax, inheritance tax and national insurance. The threshold at which higher earners start to pay the 45p rate was also reduced from £150,000 to £125,140. Compared with the swashbuckling tax changes announced by Liz Truss and Kwasi Kwarteng as part of the mini-Budget, the Autumn Statement’s “threshold freezes” sound positively insipid.

See also: How bad is the fiscal drag for your pocket?

But now to the feathers. Inflation is still running at over 10 per cent, and the Office for Budget Responsibility (OBR) forecasts that nominal wage growth will remain high over the next two years. Crucially, though, incomes will not rise fast enough to keep up with inflation, meaning that real wages will fall significantly. This means that millions will be pulled into higher tax bands at a time when they are feeling anything but flush.

What’s more, the Autumn Statement’s tax changes will have a significant direct impact on the economy over the next six years, as the chart below shows. The Office for Budget Responsibility (OBR) estimates that the freeze on the personal allowance and the higher rate income tax threshold will create 3.2mn more taxpayers and drag 2.6mn more into the higher-rate band. The freezes are expected to raise an additional £26bn a year relative to raising the thresholds in line with consumer price index (CPI) inflation.

At a household level, stealth taxes will also be felt keenly. The Resolution Foundation think tank argues that “relying on stealthy threshold freezes rather than more visible rate rises does raise some fairness questions”, and pockets of inconsistency have already emerged. Under the new measures, someone earning £62,000 loses the same cash amount as someone on £124,000 (£1,600), but this of course equates to twice as much as a share of income (2.6 versus 1.3 per cent). An employee earning £15,500 will lose 3 per cent of their gross income by 2027-28 due to these tax rises. 

Threshold freezes will leave groups of taxpayers facing surprises, too. Some high earners will find themselves contending with more than the 45p tax rate: after £100,000 the personal allowance is removed, leaving some workers on income between £100,000 and £125,000 facing a marginal tax rate of 60 per cent. Since the government froze the student loan repayment threshold in January, younger graduates paying higher-rate income tax (but who do not fall foul of the £100,000-£125,000 trap) face a marginal deduction of over 52 per cent. The situation for families can be even more complicated: child benefit payments start to be removed once one parent earns above £50,000, and if a parent earns over £100,000 they lose access to free hours of childcare. 

This marks a huge increase in the marginal rate of tax faced by millions of people, and Paul Johnson, director of the Institute of Fiscal Studies (IFS) think tank, argues that the Autumn Statement policies represent a “fundamental change to our income tax system”. He argues that the UK can live with higher taxes, “but without some serious reform the price we will pay for them will be much more than it need be”. 

According to calculations by the Institute for Fiscal Studies (IFS), around 2mn people will pay income tax at 60 per cent or 45 per cent rates by 2027-28: more people than were paying the 40 per cent higher rate in 1990. The IFS estimates that as a result of the threshold freezes, nearly 8mn people will end up paying the 40p per cent higher rate by the late 2020s – representing a near-doubling in a decade.

Johnson argues that “if tax is to stay high it is more important than ever that the tax system is both equitable and efficient”. Perhaps we need some more hissing.