The left-leaning think tank, the Resolution Foundation, has proposed that working individuals in the United Kingdom would have been better served if the government had broken its manifesto promise by raising income tax rates instead of freezing income tax thresholds. The report, released in October 2023, suggests that this approach could have been more beneficial for low- and middle-income earners.
According to the Resolution Foundation, freezing income tax thresholds is less progressive than implementing a modest increase in tax rates by 1p. This means that as inflation continues to rise, the real value of tax-free allowances declines, effectively leading to higher tax burdens on workers. The foundation argues that maintaining the current thresholds will disproportionately affect those already struggling with the cost of living crisis.
Impact on Working Class
The think tank’s analysis highlights the potential financial strain faced by working individuals. The UK Government has pledged to freeze these thresholds until 2026, a policy that could push many earners into higher tax brackets without an actual rise in income. This situation, referred to as “fiscal drag,” effectively taxes individuals more as their wages increase, even if those increases do not keep pace with inflation.
The Resolution Foundation emphasizes that raising tax rates by a mere 1p could have provided a more equitable solution, alleviating some financial pressure on the working class. The foundation’s report points out that a small increase in tax rates would have been less burdensome and more effective in addressing the needs of low-income households.
The implications of these findings are significant, especially as the UK grapples with ongoing economic challenges. Many families are already feeling the pinch from rising energy costs and inflation, which reached a staggering 10% in recent months. The think tank argues that the current tax policy fails to address these urgent economic realities.
Government Response and Future Considerations
The UK Government has defended its decision to freeze income tax thresholds, stating that it is necessary for maintaining fiscal discipline and ensuring the sustainability of public finances. Yet critics, including the Resolution Foundation, assert that this approach overlooks the immediate needs of households struggling to make ends meet.
As discussions about tax policy continue, the Resolution Foundation is calling for a review of fiscal strategies to better support working individuals. They advocate for a more progressive tax system that considers the realities of living costs and provides relief to those most affected by economic downturns.
Looking ahead, the debate over income tax rates and thresholds is likely to intensify. The Resolution Foundation‘s stance highlights the ongoing tension between fiscal policy and the financial well-being of ordinary citizens. As the government prepares for future budgets, the voices of think tanks and economic analysts will play a crucial role in shaping a fairer tax landscape for all.
