Millions are facing new tax headache over income bands freeze
27th October 2022

Millions are facing new tax headache: Income bands freeze could lead to more people paying higher rate, analysis shows

  • Around three million more taxpayers will pay the 40p rate under current freeze
  • Government reportedly considering two-year extension to tax thresholds freeze
  • PM and Chancellor scramble to fill a £40billion black hole in the public finances

Millions more workers will be dragged into paying the basic and higher rates of tax if the freeze on thresholds is extended for another two years, analysis showed last night.

Around three million more taxpayers will pay the 40p rate under the current freeze in place until 2025-26, with a further 3.5million paying the 20p rate, a study says.

But another three million could be dragged into paying either the lowest or higher rates if the freeze on thresholds is extended until 2027-28 in what has been dubbed a ‘stealth tax’.

The figures emerged as ministers piled pressure on Rishi Sunak to maintain the pension triple lock after Downing Street signalled that it faces reform.

Around three million more taxpayers will pay the 40p rate under the current freeze in place until 2025-26, with a further 3.5million paying the 20p rate, a study says

The Government is reportedly considering a two-year extension to the income tax thresholds freeze as the Prime Minister and Chancellor Jeremy Hunt scramble to fill a £40billion black hole in the public finances.

The Bank of England projects that the current freeze will raise £30billon by 2025-26. Think-tank the Institute for Fiscal Studies (IFS) said extending it by two years could raise a further £4-5billion.

The IFS study estimates 7.7million workers will be paying the 40p tax rate of income tax by 2025-26, compared with 4.6million if there was no freeze and thresholds rose with inflation.

Separate analysis by the Centre for Economics and Business Research suggests a further three million workers could be dragged into paying the basic and higher rate of tax during the potential two-year extension period covering 2026-27 and 2027-28.

The Government is reportedly considering a two-year extension to the income tax thresholds freeze as the Prime Minister and Chancellor Jeremy Hunt scramble to fill a £40billion black hole in the public finances

Freezing the personal allowance and higher-rate threshold until 2026 could add a total of as much as £14,990 to the income tax bill of a worker on a £60,000 salary. 

They would lose a further £8,111 if the threshold freezes were extended to 2027-28. A worker on a £30,000 salary would pay an extra £3,000 between now and 2028, of which £1,623 would be paid in the 2026-27 and 2027-28 tax years.

The first £12,570 of income is tax free. The 20p rate is paid on income between that amount and £50,270, the 40p rate on income up to £150,000 and the 45p rate on income above £150,000.

Tom Wernham, of the IFS, said: ‘The Government faces tough choices. But raising taxes by freezing thresholds is opaque and stealthy.’ A Treasury spokesman said: ‘We do not comment on speculation around tax changes outside of fiscal events.’

Downing Street hinted yesterday that the state pension triple lock may face reform to make it more sustainable and ‘provide certainty in the long term’.

The triple lock, introduced in 2010, guarantees that the pension will rise in line with either inflation, earnings or 2.5 per cent, whichever is the highest. Cabinet Office minister Nadhim Zahawi said ‘tough decisions’ would be needed to balance the books in next month’s Budget.

But he suggested pensioners should be protected, saying they were ‘uniquely vulnerable’ at a time of high inflation. ‘I know the PM and Chancellor will be very conscious of that fact,’ he said.

Another minister said it would be ‘electoral suicide’ to drop the triple lock, which the Conservatives pledged to protect in their 2019 manifesto.

The PM’s official spokesman said: ‘We do recognise that uncertainty is difficult for pensioners and other groups. That’s why the Prime Minister and the Chancellor believe it is right to take the time to work carefully to come up with proposals that will provide that certainty in the long term.

‘Decisions will be guided by the values of the Government and will be done with compassion.’

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