“Boring”. That’s what everyone said John Healey’s first Budget as Chancellor would be. Not so if you’re a younger adult currently working and trying to build a life. A career, a family, a home.
The devil is in the detail. Make no mistake, this is what the detail shows: stealth tax rises on workers will continue under Healey. Just as Rachel Reeves looked to people in their twenties, thirties and forties to bump the Treasury’s funds, Healey is doing the same.
With our fiscal headroom reduced by the US war on Iran, that is how the Government is paying for many of its worthwhile announcements today: better paternity leave, the end of the benefits cliff edge for carers and, crucially, protecting pensioners from income tax when their state pension rises.
In 2024, Labour promised that working people would not face tax rises if it was elected. Healey reiterated that promise today. However, by stealth, this is exactly what is happening. And it is happening to middle-class millennials who are now finally earning decent money – £50,000 or more – perhaps for the first time in their lives.
Indeed, it would not be wrong to say that the biggest effective tax rise in history is taking place. Why? Because income tax thresholds – that is, the amount of money at which you go from paying no income tax to 20 per cent, then 40 per cent and, eventually, 45 per cent – have now been frozen since 2021.
You are now dragged into paying the higher tax rate of 40 per cent if you earn £50,271 or more. You stay in that bracket until you earn £125,000, but at £100,000 a year you lose your personal tax-free allowance and your entitlement to state-funded free childcare.
This tax rate used to be for some of the richest people in our society. But because of wage increases in recent years as employers give their inflation-hit workers pay rises, the number of people earning over £50,000 has roughly doubled over the last decade, up from about 3.5 to around seven million.
Under Healey, these bands are going to remain frozen until April 2031. Also known as fiscal drag, this means that as younger workers’ earnings go up, just as they hit what we unflatteringly call midlife, they will be pulled into paying more tax because the thresholds are not rising in line with wage inflation.
In short, this means your pay rise just isn’t worth as much as it should be because more of it will go to HMRC. It is estimated that these freezes will bring in at least £55bn for the Treasury by 2030-31.
This isn’t good for our economy. Britain’s economic watchdog, the Office for Budget Responsibility (OBR), has warned that there will be no real earnings growth in Britain next year. This means that tax and inflation will eat away at every penny of the pay rises the average worker gets. And, because people will have less disposable income as a result, the OBR thinks our economy will grow less.
But it is even tougher for millennials. They are the generation now approaching their forties. Early midlife! The generation who graduated after the 2008 financial crisis were subjected to historically high house prices and rents, bigger student loans, and then the inflation crisis that took hold as the pandemic ended and Russia invaded Ukraine.
They may be earning more on paper, but they are paying more in taxes and living costs while also repaying huge mortgages and high rents. Wage growth is crucial for living standards to improve. This is why millennials and Gen Z are forecast to be the first generations to be worse off than their parents since the Second World War.
Soon, a quarter of all taxpayers in Britain will be higher or additional rate taxpayers. Many of them are at a crucial stage in their lives and, instead of building wealth, they are watching their money evaporate every payday. If tax thresholds had risen in line with wages in recent years, this wouldn’t be happening.
One of the biggest criticisms levelled at new Prime Minister Andy Burnham is that he is a vibes-based Prime Minister. Well, vibes matter. We vote based on how they feel. We make decisions about having children, starting businesses and investing money based on how we feel. Right now, younger adults feel that they’ve been dealt a bad hand. That they’ve been treated unfairly. They’re not wrong.
Healey and Burnham have made “everyday economics” and fiscal discipline the key themes of their first Budget. They’ve exempted gherkins from import tariffs and tried to make energy bills cheaper, but people in their twenties, thirties and forties can feel that this isn’t going to help them.
They feel it every month when they look at their payslip. They feel it when they try to get a mortgage or rent a home. They feel it when they’re trying to decide whether or not to have a baby or a second child.
There is much to be interested in today’s Budget: huge devolution changes that will give mayors around the country more genuine economic power by letting them keep taxes generated at a local level; and a new homeownership scheme called Your First Home which will help a small number of first-time buyers.
Burnham’s pledge to scrap the triple lock from 2030 is also a huge signal of intent. However, the income tax threshold freezes hammering people in the middle of their lives will not hit older people. Pensioners are still the winners today. Healey confirmed that they will be shielded from paying income tax even as the state pension rises, bringing more lower-income pensioners in above the threshold for paying tax.
Younger people tell me they’re “impressed” so far by Burnham’s government. But there’s always a caveat: they want to see some action on their living costs and standards soon.
They are going to have to wait.
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