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

Germany prepares €10bn (£8.5bn) in aid for families struggling with rising costs of living as UK households brace for €30bn stealth tax raid pounds boosted by rising prices.

Finance Minister Christian Lindner said the country would raise income tax thresholds while millions of British taxpayers would be pushed into higher brackets, costing them £30billion a year.

Germany will increase the tax-free basic allowance and will also increase the level at which the country’s top tax rate of 42% will kick in to help counter soaring inflation.

Mr Lindner said: ‘Allowing taxes to rise during these times is unfair and is dangerous for economic development.’ Families with dependent children would also get additional relief, he said.

Mr Lindner said the action – dubbed the Inflation Compensation Act – would support the “broad middle” of families, giving people an extra €192 on average.

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

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

Economists have warned that this phenomenon, also known as the ‘fiscal drag’, has already grown four times more than the Treasury forecast, enough to wipe out the net impacts of £14billion of tax cuts on the national insurance pledged by Conservative leadership favorite Liz Truss.

Both Ms Truss and Mr Sunak are under pressure to unveil additional support as households – already facing a cost of living crisis with inflation at its highest level in 40 years – brace for bills of energy exceed £4,200 this winter.

Ben Zaranko, senior economist at IFS, said: “If you’re looking to help low-to-middle income households through the tax system, it would make much more sense to raise thresholds rather than lower rates. “

The German package should be officially presented next week.

He could still face further changes following discussions within the country’s ruling coalition. Mr Lindner, who is part of the centrist Liberal Democrat Party, said the plans would not offer as much to high earners.

The Greens, who are also part of Olaf Scholz’s government and are more to the left politically, opposed the plan and called for aid to be targeted more to the poorest households.

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