Britain’s biggest stealth tax is costing families an ‘eye-watering’ £340billion and will leave more than 10million people in higher rate bands, Budget documents show.
Rachel Reeves this week extended the freeze on income tax thresholds for another three years to help fund extra spending on benefits – hitting millions of working people in the process.
The move means the level at which the 20p, 40p and 45p rates of income tax kick in will have been unchanged between 2022-23 and 2030-31 instead of rising with inflation.
Coupled with a freeze on when national insurance kicks in, the Office for Budget Responsibility (OBR) estimates that the stealth tax raid will cost families an extra £340billion over the nine-year period.
This includes £67billion in 2030-31 alone as millions of workers are dragged into higher rate bands.
The extension of the freeze on thresholds sparked accusations that Labour has broken its manifesto promise not to raise taxes on working people.
Ruth Curtice, chief executive of the Resolution Foundation, described the freeze on thresholds – which started under the Tories and has been extended by Labour – as ‘Britain’s biggest stealth tax rise’.
This is because so-called ‘fiscal drag’ pulls people into paying higher income tax rates as their earnings rise above the frozen thresholds.
OBR figures show the number of people paying the 40p rate of tax will rise from 7.2million this year to 8.9milion in 2030-31. A further 1.6million will pay 45p in the pound, up from 1.2million now.
It means one-in-four taxpayers – or 10.5million people – will be paying higher rates of income tax at the start of the next decade.
That is up from 4.25million in 2020, 3.2million in 2010 and 2.5million in 2000.
Jason Hollands, managing director at wealth management firm Evelyn Partners, said: ‘This is a massive income tax rise by stealth. The power of this policy to increase the income tax and national insurance burden over the years is really quite eye-watering.
‘While the Chancellor can try to argue otherwise, this is very much an increase in income tax on working people across all income levels, as millions more will be drawn into paying income tax at both the basic rate and the higher bands.
‘But as people won’t see an immediate change in their take-home pay and the tax burden just builds over time it is the very definition of a stealth tax. Higher rate tax, once the preserve of the wealthy, is going to be the default rate of middle-income salaried roles, most of whom don’t feel comfortably off, never-mind affluent.’
Rachel Reeves extended the freeze on income tax thresholds for three years
The personal allowance – the amount you can earn before paying the 20p income tax rate – has been frozen at £12,570 since 2022-23.
The then Tory government also froze the higher rate threshold at which point 40p tax kicks in at £50,270.
Had the personal allowance and higher-rate threshold been risen in line with inflation, they would be at £17,470 and £70,370 in 2030-31, according to the OBR.
The 45p threshold was lowered from £150,000 to £125,140 from April 2023 and it has been stuck there ever since.
Mr Hollands said the additional rate ‘is now catching a much wider cohort than the UK’s very highest earners’ and ‘makes a mockery of the idea that these quite onerous marginal rates should be reserved’ for the best paid.
When it was introduced in 2010-11, just 236,000 paid the 45p rate. Nearly seven times that number will be paying it by 2030-31.
Craig Hughes, head of private client services at accountancy firm Menzies, said: ‘Freezing thresholds increases tax liabilities for millions by stealth, including those who would otherwise not be considered higher-rate taxpayers, and places a growing strain on working households.’
Craig Rickman, personal finance expert at Interactive Investor, said: ‘Extending the freeze on income tax thresholds to 2031 is another tax increase in all but name and arguably breaks the election manifesto pledge not to raise tax on working people. With inflation easing but wages still rising, the decision means millions will hand over a bigger slice of their pay without any change to the headline tax rate.’
Mike Ambery, retirement savings director at Standard Life, said: ‘The Government’s decision to extend the freeze on income tax thresholds until 2031 represents one of the most significant stealth tax rises in recent years.’
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