With taxpayers on track to pay £40bn by 2028 as a result of the freeze on personal tax thresholds, the impact on individuals will be long lasting, an expert has warned.
Research by the Resolution Foundation, published on Friday (October 6), found the policy is expected to lead to Britain’s biggest tax rise on incomes in at least 50 years.
Laura Suter, head of personal finance at AJ Bell, said the decision will come at a large cost for most UK households.
The company estimates someone earning £50,000 will pay an extra £9,000 over the six years of the threshold freeze, compared with if the threshold had been increased in line with inflation.
Suter said: “Higher inflation typically equals higher wages, which will push more people into the next tax bracket.
“Had income tax bands been linked to inflation, rather than frozen, we’d have seen a sizeable leap in the amount people could earn each year before hitting the next tax bracket. On top of the frozen allowances the government reduced the threshold for additional rate tax, dragging more people into the top rate of tax.”
She added this is equivalent to someone on the average UK salary of £33,000 seeing an increase in their basic income tax of 22 per cent, while a higher earner with £75,000 of earnings will be hit by the equivalent of both the basic-rate and higher-rates of tax increasing by three percentage points each, to 23 per cent and 43 per cent respectively.
Suter said: “Imagine the uproar if the government had increased the basic rate of tax from 20 per cent up to 23.5 per cent.
“Not least because it would break a manifesto commitment. But most taxpayers don’t understand how ‘fiscal drag’ works or the real impact of the frozen allowances.
"What’s more, unless the government hikes tax thresholds by huge amounts in 2028 (or overhauls the income tax system), it’s a fiscal drag that we’ll take forward for the rest of our working lives – those lost six years can never be reclaimed.”
tara.o'connor@ft.com
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