In Focus: Tax Year End  

Sunak's tax cuts offset existing rises by just a sixth

Sunak's tax cuts offset existing rises by just a sixth
Chancellor of the exchequer Rishi Sunak

The tax cuts announced in yesterday's Spring Statement only offset existing or planned tax rises by one sixth, according to the government's independent forecasting body.

The Office for Budget Responsibility has said the tax burden will increase to 36.3 per cent of GDP in 2026-27 - compared to 33 per cent in 2019-20 when Rishi Sunak became chancellor of the exchequer.

In his statement, Sunak announced that he was raising the national insurance threshold by £3,000 from July and that the base rate of income tax would be cut from 20p in the pound to 19p in 2024.

But the OBR said: "Net tax cuts announced in this Spring Statement offset around a sixth of the net tax rises introduced by this chancellor since he took over the role in February 2020, and just over a quarter of the personal tax rises he announced last year (the freezing of the income tax personal allowance and higher-rate threshold and new health and social care levy).

"Those net tax rises, plus the more tax-rich composition of economic activity that has been factored into this forecast, raise the tax burden from the 33 per cent of GDP recorded in 2019-20 to 36.3 per cent of GDP in 2026-27 – its highest level since the late 1940s."

In his Budget last year, Sunak announced that national insurance contributions would rise by 1.25 percentage points to help fund the NHS and despite lobbying by Conservative MPs, the chancellor announced that this rise will go ahead as planned.

Last year Sunak also froze the thresholds on income tax and capital gains tax and he froze the lifetime allowance on pensions.

He has also announced corporation tax will increase to 25 per cent in April 2023 while the lifetime limit on entrepreneur's relief was cut from £10mn to £1mn in Sunak's first Budget.

Today the chancellor also announced that fuel duty would fall by 5p but since this is only temporary - and will be reversed in 12 months - the OBR said it would not affect the tax burden.

The OBR said that based on the system Sunak inherited, the tax burden would only have risen by 0.8 percentage points but instead it has risen by 3.3 percentage points.

It said: "The 2.5 percentage point rise in the tax burden relative to that inherited position is largely explained by the tax rises announced by the current chancellor."

Addressing the House of Commons yesterday, Sunak said his plans to cut the base rate of income tax would be a £5bn tax cut for 30mn people.

He said: "It is only because this government has been prepared to make those difficult but responsible choices to fix our public finances that I can stand here and tell this House that not only are taxes being cut but that debt is also falling whilst public spending is increasing."

"My tax plan delivers the biggest net cut to personal taxes in over a quarter of a century," he added.