UK households are facing a sustained period of frozen income tax thresholds, with the current bands set to remain unchanged until April 2028. This policy, often referred to as 'fiscal drag', means that as wages increase due to inflation or pay rises, more individuals will find themselves paying a higher proportion of their income in tax, or moving into a higher tax bracket altogether.
Currently, the personal allowance, the amount of income an individual can earn before paying any income tax, stands at £12,570. The threshold for the 20% basic rate of tax is also £12,570, meaning earnings above this amount are taxed. For the 40% higher rate, the threshold is £50,270, and the 45% additional rate begins at £125,140. These figures are scheduled to remain static for the next four years.
The policy was initially announced by former Chancellor Rishi Sunak in March 2021, who committed to freezing the personal allowance and higher rate threshold for four years from April 2022. This was subsequently extended by current Chancellor Jeremy Hunt in his Autumn Statement 2022, pushing the freeze out to April 2028. The rationale behind this decision was to strengthen the public finances following significant government spending during the COVID-19 pandemic and the energy crisis.
The implications of this prolonged freeze are significant for UK taxpayers. As average earnings continue to rise, a greater number of people will cross the existing tax thresholds. For instance, someone earning £45,000 today might remain a basic rate taxpayer, but if their salary increases to £55,000 by 2026, they would then become a higher rate taxpayer, paying 40% on the portion of their income above £50,270, without any change in the tax rules themselves. This effect is compounded by inflation, which erodes the real value of these fixed thresholds.
The government's position is that the freeze is a necessary measure to ensure fiscal responsibility and reduce the national debt. However, opposition parties and independent think tanks have criticised the policy, arguing that it disproportionately affects middle-income earners and those on lower incomes who see modest pay rises. The Institute for Fiscal Studies, for example, has previously highlighted that fiscal drag acts as a stealth tax, extracting more revenue from households without explicit increases in tax rates.
The Labour Party has consistently called for a fairer tax system, though they have not committed to reversing the current tax threshold freezes. The Liberal Democrats have also voiced concerns about the impact on living standards. As the next general election approaches, the debate around taxation and the cost of living is expected to intensify, with the frozen tax bands likely to remain a key point of discussion.
Source: Money Saving Expert