Income tax thresholds will remain frozen for an additional three years, pushing more workers into higher tax bands as wages rise with inflation.
The threshold freeze has been extended to April 2031 and is forecast to generate £8.3bn by 2030. At present, earnings between £12,570 and £50,270 fall into the 20 percent bracket while those between £50,271 and £125,140 are taxed at 40 percent, anything above this level is charged at 45 percent.
The thresholds were first frozen in April 2021 after the Conservative government set a five-year pause, following an increase in the personal allowance from £12,500 to £12,570. The freeze was then extended in 2022, and has been extended for the third time in today’s budget.
This measure, often referred to as ‘fiscal drag’, is used by governments to raise more tax revenue without increasing the rate of tax as people are ‘dragged’ into higher tax bands.
Many people’s wages rise only in line with inflation, meaning their purchasing power doesn’t actually increase. But if inflation-linked pay rises push them into a higher tax band, they end up paying more tax even though they aren’t any better off in real terms.
The Institute for Fiscal Studies estimate around 790,000 additional people will be dragged into a higher tax band by the freeze. However, in a statement on 23 November, the Liberal Democrats said they estimated that 1.3 million people will be dragged into a higher tax band.
Attacking both Labour and the Conservatives, the Lib Dems said 9 million people have been dragged into a higher tax rate since the freeze in 2021, with the total value of tax revenue from the fiscal drag set to reach £55.9bn a year by 2029-30.
A tax analyst from one of the Big Four firms called the move a “debatably clever workaround from actually raising income tax rates”, but “by protecting the working taxpayer she has put a tight squeeze on the British middle-earner”.
Labour have responded by saying that 90 percent of people won’t pay anymore income tax as they are not near the thresholds.
The Financial Times calculated that those earning around £50,000 a year will be most affected, paying 1.5 percentage points more of their income on income tax and national insurance.
The Chancellor has today raised taxes by £26bn in total as she asks everyone to contribute to make the tax system “fairer and fit for the 21st century.”
