Tax warning as HMRC grabs up to 65% of workers’ incomes and ‘it’ll get worse’ as Hunt cuts | Personal Finance | Finance

Hunt scrapped plans to cut the basic rate of income tax to 19 percent, and it will now stay at 20 percent “indefinitely”. The additional 45 percent tax rate is unlikely to be challenged for years.

Yet this is only the start of the pain for taxpayers, as former Chancellor Rishi Sunak’s five-year freeze on income tax allowances will stay in force until at least 2026. This will push millions into higher income tax bands as earnings rise, a process known as fiscal drag.

The UK tax system is horrendously complicated and many fail to realise exactly how much of their income they are handing over to HM Revenue & Customs.

Some will end up sacrificing almost two thirds of their earnings in a combination of income tax charges and lost benefits and allowances.

That is before they pay other levies, such as VAT, capital gains tax and inheritance tax, with the tax burden at a 70-year high and set to stay there.

Tax specialist Andrew Marr, managing partner at Forbes Dawson, said Hunt’s U-turn on scrapping the corporation tax increase to 25 percent and 1.25 percent tax on dividends will hit small business owners particularly hard.

Under former Chancellor Kwasi Kwarteng’s abandoned plans, a business shareholder paying top-rate tax would have received £50 for every £100 of profit from April 1, 2023.

Now they will only receive £45 – giving a marginal tax rate of 55 percent. “This u-turn has crossed the psychologically important 50 percent threshold,” Marr said.

This is only the start of the pain, because Hunt’s warning that he will make “decisions of eye-watering difficulty” all but guarantees that many of the UK’s most punitive stealth taxes will persist.

A forgotten tax called high income child benefit, introduced in 2013, claws back child benefit where one parent earns more than £50,000.

It costs a family with two children nearly £2,000 a year, and that £50,000 threshold has not been increased for almost a decade. The marginal tax rate is a staggering 65 percent, and around 630,000 pay it.

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This tax is unfair, because a working couple who each earn, say, £40,000, will escape despite having a higher total household income of £80,000.

Similarly, a tax that cuts the personal allowance by £1 for every £2 someone earns above £100,000 has been held at that level since 2010. This sets a 60 percent marginal tax rate.

Under the pension lifetime allowance, savers hand over a punitive 55 percent of their pot to HMRC, once it exceeds £1,073,100.

That has already caught out 1.6 million and the number of victims will steadily rise because the LTA has been cut from £1.8million, and now frozen until at least 2026. Soon more than two million could get hit.

The impact of fiscal drag was relatively minor when inflation was close to the Bank of England’s target of 2 percent, said Shaun Moore, tax and financial planning expert at Quilter. “As inflation continues to reach sky-high levels and is yet to show any real signs of a slowdown, it is getting steadily worse.”

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Moore said the various tax allowances and thresholds are supposed to incentivise people to save for their future and distribute their wealth. “But many of these have taken severe hits over the past decade and continue to face a big freeze despite the cost of living crisis.”

While allowances have been frozen, inflation has risen by 28 percent over the decade, and is expected to have climbed by 11 percent in the year to October. “It continues to rise each month, effectively decreasing the allowances in real terms over time.”

Moore said Hunt’s decision to reverse the basic rate of income tax cut will have left many feeling hard done by. “The glimmer of hope for a small increase in monthly take home pay has been snuffed out.”

Marginal tax rates remain incredibly high and in real terms, people will be taking home less money as the rate of inflation continues to soar.