The recent announcement regarding these frozen tax thresholds has focused minds and raised fears. Taxpayers throughout the United Kingdom are understandably alarmed at the implications of this decision. The policy is immediately on course to produce an amazing £56 billion in net revenue. With the newly announced three-year extension, it’ll tack an estimated £12 billion on top. This is a consequential decision that will affect nearly every one million riders. Once their earnings unequivocally go above the income tax threshold of £12,570, they will be taxed.
The freeze on the personal allowance and tax rate thresholds means that as inflation continues to rise, more and more people will automatically be pushed into higher tax brackets. First, as wages inevitably increase, an ever increasing share of taxpayers will move into the proposed new 40% tax bracket. Recent estimates indicate that another 600,000 individuals will soon be subject to the punitive 45% tax rate. This affects people with incomes above £125,140.
The ramifications of these frozen thresholds are nothing short of huge. It is not the time to further increase the financial burden on the many taxpayers who are currently facing tougher economic times. As the thresholds haven’t been updated for inflation since 2021, they are now stuck paying hundreds of pounds more in tax. This is especially true for those making minimum wage. Moreover, an employee working as few as 18 hours a week would still be subject to income tax.
Looking ahead, it is estimated that nearly one in four taxpayers will belong to the higher rate bracket by the year 2031. This statistic just highlights the growing phenomenon of taxpayers getting pinched by eroding thresholds while overall incomes continue to increase. The danger is insidious because the average state pension is already so low, at just under £12,000 a year. Yet, these arbitrary and frozen thresholds will deeply influence its worth.
If tax thresholds had been adjusted after 2028, a full-time minimum wage earner would not have incurred an extra £137 in taxes by 2030. This development is deeply alarming. In fact, prior to the financial crisis this personal allowance was closer to £5,000—well below today’s value, even once you factor in inflation. The personal allowance had allowed to increase until the pandemic came along and halting this pattern of growth.
By stealthily increasing the kind of thresholds you usually hear call from conservatives to raise, freezing the thresholds has raised taxes for millions of people. I’m told this freeze is likely to be extended all the way through the outyears, with thresholds not starting to increase again until 2031.
For taxpayers in Scotland too, a frozen tax-free allowance is bad news laced. Tax bands are not the same as in England and Wales.
From the start, frozen tax thresholds impose steep financial penalties. They raise critical new questions about fairness and equity in our tax code. It’s pushing more people into higher tax brackets without increasing their pay. This real-life scenario could be the basis of qualified doubt about the equity of the new progressive statewide income tax system.