Budget: Stealth tax raid making some earners £3,800 worse off
Freezing income tax thresholds is set to make a worker earning the median wage as much as £2,310 worse off had the measure never been introduced as Chancellor Rachel Reeves looks set to unleash a stealth tax raid at the Autumn Budget.
Analysis by Quilter has revealed that extending the current freeze alone will add an extra £843 tax bill to middle earners over the next five years.
Separate figures from the TaxPayers’ Alliance has suggested that those on the median income will be £2,310 worse off had the tax never been introduced in 2021.
Those in the 75th percentile of earnings, which includes those on a salary of around £50,000, will be £3,844 worse off by 2030 while top earners will be paying £6,515 more.
Freeze to drag 800,000 into higher tax rate
An extension would deepen the ‘fiscal drag’, with thresholds for income tax failing to be adjusted with inflation.
It is believed that Reeves will raise more than £10bn in extra revenue by 2030 from the extension, making up the biggest chunk of tax hikes at the Budget as the Chancellor looks to plug a £30bn fiscal hole.
The current freeze on thresholds has been in place for the last four years, with the measure being introduced when Rishi Sunak was Chancellor and inflation sat around 2.5 per cent.
It had been set to expire in 2028, with Reeves saying at last year’s Budget that she would unfreeze tax thresholds as part of a “promise” made in the Labour Party manifesto.
Shaun Moore, a financial planning expert at Quilter, said: “People have already been dragged into higher tax brackets simply because their wages have risen only to stand still in real terms.”
Recent research by the Institute for Fiscal Studies indicated that there would be 960,000 more people paying income tax by 2030 as a result of the freeze.
This would add the total number of income taxpayers up to 42.1m. This figure is 5.1m higher than what would have happened if no freeze was introduced under Sunak after the pandemic.
The measure will also lead to individuals on the full state pension, which is uprated by whichever is highest out of inflation or wage growth under the triple lock pension, paying income tax for the first time.
Earners are also being dragged into higher tax bands as a result of the freeze.
IFS research showed that some 790,000 more Britons will fall under the higher tax rate of 40 per cent by the end of parliament. It also warned that more minimum wage workers were being pulled into paying income tax.