Want to understand what’s really going on in Britain, and how we can fix it?
Join Vicky’s subscriber-only newsletter, The State We’re In, where she breaks down the big issues shaping the country. You can sign up to get it sent straight to your inbox, every single week, here.
Right now, Britain is an awful place to be young. And, by young, I mean under 40 – perhaps, even, 45. Housing is expensive and in short supply. The cost-of-living remains high. Childcare support is meagre even where it is available, and if you dare to progress to a household income of more than £100,000 a year, it evaporates entirely.
Don’t forget, either, that young adults who went to university after 2012 and paid £9,000 a year, are, according to the Fairness Foundation, already battling “negative wealth” with debts that outweigh their assets.
So what’s coming up in today’s newsletter?
- Why Labour’s Budget is unfair on younger generations?
- How upping young adults’ taxes could cause economic problems further down the line…
- The problem with Rachel Reeves’s so-called “mansion tax”
Last week’s “smorgashambles” Budget of stealth tax rises for young professionals made this bleak picture even bleaker. And it’s people earning just above £50,000 – which is where the higher rate of 40 per cent income tax kicks in – who will be most affected.
Labour were elected after promising the country that they would not raise taxes. And yet, by freezing tax thresholds and student loan repayment thresholds last week, in effect, that is what they have done.
For years, intergenerational inequality has been festering across the UK. It is fuelled by the unequal distribution of housing wealth – which mainly belongs to older people – and the state pension triple lock – which means that pensioners are always guaranteed to see their income rise, when workers are not.
In short, British politics and policy rely on extracting money via taxes from working-age people in their 20s, 30s and 40s, to fund the state pensions and care of older people, who often, though not always, own the sort of homes that their younger counterparts may never be able to afford.
As I wrote in my column on the day that Chancellor Rachel Reeves delivered her plan for Britain’s finances to the House of Commons, it is mainly middle-class, middle-earning and early middle-aged millennials who are being asked to pay more into the state by this Labour government. But there’s a big problem with that: they can’t really afford it. And, while taxing younger people more might solve Labour’s problems in the short term, it could have economic repercussions in decades to come.
First, let’s look at what’s being asked of young people.
Tax thresholds have been frozen
Reeves has frozen income tax thresholds rather than allowing them to rise with wage inflation until 2031. This is known as ‘fiscal drag’: it means that millions of working people will be dragged into higher-rate tax bands than otherwise would have been.
It’s thought that over 2 million people will now be caught in what has been called “the £100,000 tax trap”. This is the uncomfortable spot between earning £100,000 a year and £125,140 where you effectively pay a tax rate of 60 per cent because the tax-free personal earnings allowance starts to disappear. These people also lose access to subsidised nursery care for children.
According to the Office for Budget Responsibility (OBR), nearly 1 million (920,000) more people in England, Wales, and Northern Ireland will be paying the 40 per cent higher rate of income tax by 2029–30.
For those who have student loans to repay, this is going to be particularly painful.
Student loan repayment thresholds have been frozen
Not only will tax thresholds not be linked to inflation in the coming years, but the threshold at which graduates start to repay their loans is also being frozen for three years from 2027.
As someone who finally managed to repay my loan a few years ago, I really do feel for anyone who will be caught by this. For the first time, in my late thirties, I am paid my full salary after tax without hundreds of pounds of student loan repayment deductions, and it has made me realise how much money I’ve missed out on.
Reeves’s decision to keep repayment thresholds and interest rates for Plan 2 student loans where they are means that people’s repayments will be calculated on a higher proportion of their income.
As I’ve written before, student loan repayments are, in effect, a graduate tax. And, now, a graduate who earns £50,000 or more is going to find they really don’t have all that much left after all of these deductions. As a result, they may struggle to save money for the future and, in particular, for a house deposit.
The Treasury has decided to pile pressure on young adults at a crucial point in their working lives: when they are trying to max out their earning potential and accrue enough in savings to properly build a life and, if they’re lucky, generate a bit of wealth to see them through into old age.
The Government’s Budget document justifies the tuition fee repayment threshold freeze like this: “Graduates generally benefit from higher earnings, and ensuring that they repay more of their loan is fair for those workers who have not gone to university.”
But as I recently wrote in this newsletter, stagnating graduate wages and increases to the minimum wage mean that the so-called “graduate pay premium” isn’t what it once was.
Graduates on salaries of £30,000 or more now face a marginal tax rate of 37 per cent marginal tax rate, while for anyone lucky enough to have a job that drags them into the higher tax bracket of £50,271 or more is looking at 57 per cent.
Plus savings and pensions pots subject to caps
While the over-65s are going to be allowed to keep their £20,000 a year tax-free ISA savings allowance, everyone else is going to see a reduction to £12,000.
And, on top of that, Reeves is going to impose a £2,000 limit on the amount of pay that employees can “sacrifice” in pension contributions via their salary without paying national insurance.
If young people aren’t given a chance to build wealth, how will they fare in retirement? Can the Government guarantee that the triple lock on pensions will still be around to support them in old age?
Labour promised that those “with the broadest shoulders” would pay their fair share. Instead, Reeves has imposed her “mansion tax” on homes worth £2m or more, of which there aren’t that many.
When you look at what is really going on, it’s the younger workers on just-above-average salaries who seem to be being asked to support older generations who benefited from lower house prices and fee-free university. Who could blame them for feeling hard done by?
Housing Crisis Watch
Firstly, I believe that the Chancellor missed an opportunity to properly reform property taxes in Britain last week. Read why here.
And, finally, the children’s commissioner, Rachel De Souza, has warned that too many young care leavers face homelessness.
Last year’s figures show that homelessness among households with the youngest care leavers in England increased by 21 per cent, compared to around a 12 per cent more broadly.
This should be a serious cause for concern.
Your next read
What I’m reading (and watching)
- I found this brilliant account of what happened in the rooms of Number 11 Downing Street ahead of the Budget by The Observer’s Political Editor, Rachel Sylvester, absolutely excruciating.
- I watched this BBC Two documentary about one of Britain’s most brilliant artists, the painter William Turner. It made me think about class. Turner was from a working-class background, and he fought to break into the elite world of the Royal Academy. Some, including the contemporary artist Tracey Emin, argue that this is something which is still difficult to do today.
- And, finally, a shameless plug. Episode one of my new BBC Radio 4 series, Housing Britain with Vicky Spratt, airs next Monday at 11 am. You can also listen on BBC Sounds from then on.
