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Pensioners and higher-income Britons will end up being the big losers from tax and benefit changes pushed through in the current parliament, pointing to a striking shift in political strategy by the governing Conservative party.
Analysis in the wake of chancellor Jeremy Hunt’s pre-election Budget shows that of the more than 60 per cent of pensioners who pay income tax, the majority will be £650 a year worse off by 2027 as a result of policy changes in recent years. Higher-rate pensioner taxpayers will lose more than £3,000 a year, according to the Institute for Fiscal Studies think-tank.
Separate research from the Resolution Foundation think-tank shows that across the board wealthy taxpayers are the biggest losers from the Conservative government’s tax changes. It found that the top fifth of the income distribution will lose out by an average of £1,500 by 2027-28, while the typical household will gain £420.
The sum total of tax rises pushed through in recent years is “really concentrated at the top”, said James Smith, head of research at the Resolution Foundation.
The Tory party has consistently attracted the votes of over-65s via policies such as the triple lock, which increases the value of the state pension each year by average earnings growth, inflation or 2.5 per cent depending on which is highest.
But faced with the opposition Labour party’s consistent polling lead of about 20 points, the Tories are trying to broaden their appeal with tax cuts targeting middle-earning employees, as well as childcare subsidies and benefits changes focused on working parents.
Paul Johnson, director of the IFS, said pensioners had benefited over time from lower housing costs and from the triple lock, while working-age benefits had been cut. But they were still bearing the brunt of what still amounted to “very big increases in tax over this parliament” — even after the “substantial” cuts to national insurance announced since November.
“This is rather counter to the narrative we’ve had over a long period,” Johnson added, saying the chancellor’s choice to cut national insurance, a tax paid only by those of working age, was “deliberate” and “not unwelcome”.
Overall the policy changes during recent years will increases taxes paid by pensioners by about £8bn, the Resolution Foundation found.
The fresh 2p cut in national insurance announced on Wednesday, on top of an equal reduction unveiled in November, will benefit employees, rather than those who are no longer in the workforce or who rely on other forms of income including from savings and rents.
Meanwhile, decisions earlier in the parliament to freeze tax thresholds are leading to an ongoing hit for all payers of income tax, which is levied on all forms of income including pensions and investments, and not just salaries.
Recent Budget decisions have also carried a sting for those on higher incomes. Taken on their own, the tax changes announced by Hunt on Wednesday will benefit middle to higher income households the most, but the picture transforms when earlier decisions are factored in.
For example, by freezing income tax thresholds, the chancellor has dragged more people into the upper tax bracket of 45 per cent. Hunt also announced the end to the non-domicile tax status, which is popular with wealthy residents who are deemed to have a permanent overseas home. The measure will raise £3.6bn by 2027-28.
Analysis from the Office for Budget Responsibility, the fiscal watchdog, in November showed that the frozen thresholds meant that by 2028-29 some 3mn more people will move to the higher rate income tax bracket, and 400,000 more will be paying the additional rate of 45 per cent.
Meanwhile, offsetting changes to the benefit system have cushioned the impact of stagnating incomes and the surging cost of living for lower-income households.
By 2027-28, households in the bottom fifth of the income distribution will gain £840 on average thanks largely to benefit changes such as cutting the universal credit taper rate that makes it easier for people to work more without losing income.