Rishi Sunak is under renewed pressure to anticipate the $13 billion increase in social security contributions next month.
Labor has urged the Chancellor to drop the 1.25 percent hike scheduled for workers and employers on April 6 and to use money he has reportedly been saving for election candy for voters.
The research came as the Institute for Fiscal Studies (IFS) revealed that rising inflation means the Chancellor will take an extra £12.5bn from a “secret tax” in last year’s budget.
When Sunak announced a four-year freeze on income tax thresholds last March, with inflation hovering around 1 per cent, the measure was expected to raise £8billion.
With the Consumer Price Index (CPI) now above 5 per cent and expected to rise as high as 8 per cent, the IFS now amounts to an effective £20.5 billion in additional taxes, according to the IFS.
Tom Waters, Senior Research Economist at IFS, said: “Typically tax thresholds rise in line with inflation.
“The tax threshold freeze is now on course for a £20.5 billion tax hike – two and a half times what was initially expected. And that comes on top of a £13bn increase in National Insurance Contributions (NICs) next month.
“This episode highlights the danger of setting nominal tax thresholds for long periods of time – unexpected changes in inflation can make the size of a planned tax increase much larger or smaller than expected.”
Labor Treasury spokesman Pat McFadden said the rise in NICs alone represented 0.5 per cent of GDP in extra taxes at a time when households are facing skyrocketing bills for essentials like heating, petrol and groceries.
In contrast, the party’s research has revealed that Germany faces tax cuts totaling 0.5 percent of GDP by 2022, Italy 0.2 percent and France 0.1 percent.
Canada and Japan, along with other members of the G7 group of leading democracies, have not announced increases in personal tax rates, while the US Congressional Budget Office expects tax revenues to fall in 2022.
“There are global factors that are driving up energy prices and inflation in many countries,” Mr McFadden said.
“But what sets the UK apart is this government’s decision to impose a tax hike on working people at the same time as energy and food prices are rising.
“Why is the government so determined to worsen the cost of living crisis by pushing ahead with these tax hikes now, especially when the Treasury Department is constantly reporting that the Tory voting grid has scheduled tax cuts ahead of the next election?”
The increase in NICs announced last September went against a Conservative pledge not to raise key personal taxes during Parliament.
This results in a person making £20,000 seeing NICs increasing by £130 a year and someone making £30,000 a year paying an extra £255.
But Prime Minister Boris Johnson said the levy would help pay for the “biggest catch-up scheme in the history of the NHS” as the health services seek to clear the backlog of treatments delayed by the Covid pandemic.
From April next year it will be renamed Health and Social Care Levy, and over time an increasing proportion will go towards the new care cost cap, which aims to ensure older homeowners don’t have to sell their property to pay for care.
Mr Sunak is coming under increasing pressure to abandon the increase or delay it by a year on hopes the cost-of-living crisis has subsided, including from restless Tory backbenchers who fear it will increase overall tax revenue to levels not seen since the 1960s.
But the chancellor and prime minister have stood their ground, penning a joint article in January saying they see the levy as “the right plan” to fix the health and welfare system.
A UK Treasury spokesman said: “The Health and Social Care Charge will provide a necessary, ongoing source of funding to support the NHS and repair the social care system.
“We’re providing around £21bn this financial year, helping families with living expenses including targeted support with energy bills, lowering the Universal Credit taper rate to help low-income people keep more of what they earn , and freezes on alcohol and fuel taxes to keep costs down. We are also raising the National Living Wage, which means people working full-time will see a £1,000 increase in annual income.”