We agree with the Chancellor’s decision to once again freeze tax thresholds for at least the next three years. This latest move will be keenly felt by taxpayers throughout the whole of the United Kingdom. By 2031, almost one in four taxpayers will have broken into a higher tax rate bracket. While their incomes increase, tax thresholds will stay frozen in place. This revenue-raising policy will increase much-needed government revenue, but it cannot go unquestioned as it disproportionately shifts financial burdens to individuals and families.
The Chancellor’s announcement to maintain the freeze on tax thresholds means that as wages increase, more citizens will be pulled into the higher, 40% tax bracket. The personal allowance has recently been raised to £12,570. Readmissions under new criteria There will be a huge jump in the cohort of people making slightly more than this limit. More than a million people who don’t pay any income tax today will begin to contribute significantly. As inflation pushes public sector wages upwards, combined with annual pay raises, their income is increasing beyond the tax threshold.
It is taxpayers who will first feel the effects of frozen tax thresholds. Increasingly fewer Scottish taxpayers, as the tax-free allowance will remain frozen, affecting most Scots single-handedly as their English and Welsh equivalents. At the same time, other tax bands might increase. This reallocation will disproportionately impact areas differently, increasing the inequities of tax burdens and creating increases in financial uncertainty for residents.
The effects of this policy from a demographic standpoint are far-reaching, even for those who predominantly occupy part-time positions. Even a minimum wage earner working part-time at 18 hours a week would potentially owe income tax now. This is due to the fact that the income thresholds are frozen. As wages slowly climb, many who just sneak by under the radar of today’s low-income thresholds will suddenly find themselves with financial burdens they didn’t have to pay before.
The value of the state pension, which is already just under £12,000 per year, will increase as well. This increase may move some retirees into the tax income category. It demonstrably illustrates the deep and far-reaching impact of the Chancellor’s announcement to all of their constituents. A rapidly growing pension, along with increasingly invisible frozen thresholds, can blindside so many people. Consequently, they can end up with significantly lower disposable income than anticipated.
The economic hardship imposed by these changes extends beyond these low-wage earners. An estimated 600,000 more taxpayers will now be liable to pay the higher 45% rate on income over £125,140. This expansion into higher tax brackets illustrates an important problem. For those who make little above the limit, they are under the gun like never before.
We calculate the yield from freezing tax thresholds at £56 billion. Of that, £12 billion comes directly from the three-year extension. Instead, taxpayers will actually experience a higher overall tax burden this year. Many are spending hundreds of pounds extra than if the thresholds had been increased in line with inflation since 2021.
If the thresholds had increased following 2028, a full-time minimum wage earner could have paid approximately £137 less in taxes by 2030. Today’s policy is the most extreme on individuals who are most marginally above the tax thresholds. A relatively modest pay increase can soon land them in higher taxation thresholds.