Germany raises income tax thresholds as UK families brace for £30bn stealth raid

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Christian Lindner germany finance minister - Liesa Johannssen-Koppitz/Bloomberg
Christian Lindner germany finance minister - Liesa Johannssen-Koppitz/Bloomberg

Germany is preparing €10bn (£8.5bn) of relief for families battling the rising cost of living as British households brace for a £30bn stealth tax raid spurred by price increases.

Finance minister Christian Lindner said the country would raise income tax thresholds while millions of UK taxpayers are dragged into higher bands, costing them £30bn a year.

Germany will increase the base tax-free allowance and also bring up the level at which the country’s 42pc top income tax rate kicks in to help counter soaring inflation.

Mr Lindner said: “To allow for a tax increase during these times is not fair, and is dangerous for economic development." Families with dependent children would also get further relief, he said.

Mr Lindner said the action – dubbed the inflation compensation law – would support the “broad middle” of families, giving people €192 extra on average.

He warned of the dangers of “bracket creep”, in which rising salaries tip people into higher tax brackets.

It comes after the Institute for Fiscal Studies warned former chancellor Rishi Sunak’s freeze on tax thresholds had led to a £30bn annual stealth tax on British families.

Economists warned this phenomenon, also known as “fiscal drag”, had already raised four times as much as the Treasury expected, enough to wipe out the net impacts of £14bn of National Insurance tax cuts pledged by Tory leadership favourite Liz Truss.

Both Ms Truss and Mr Sunak are under pressure to unveil further support as households – already experiencing a cost of living crisis with inflation at a 40-year high – brace for energy bills to pass £4,200 this winter.

Ben Zaranko, an IFS senior economist, said: “If seeking to help low-to-middle income households through the tax system, it would make far more sense to increase thresholds, rather than cut rates.”

The German package is expected to be presented formally next week.

It could still face further changes following discussions within the country’s ruling coalition. Mr Lindner, part of the centrist Free Democratic Party, said the plans would not offer as much to benefit higher earners.

The Greens, who are also part of Olaf Scholz’s government and are more towards the political left, have opposed the plan and called for support to be more targeted at poorer households.