The government’s freeze on income tax bands is equivalent to a 3.5 percentage point rise in the headline rate of tax, analysis by AJ Bell has shown.
Someone on a salary of £50,000 will pay just under £59,000 in income tax over the next six years, in which thresholds will all be frozen.
The total tax bill will be £9,000 higher per taxpayer than if the thresholds were raised in line with inflation, AJ Bell said.
The tax hike for middle earners is more acute as they are more vulnerable to being pulled into a higher tax band than lower earners.
However, low earners are also impacted by the freeze in the personal allowance, with someone on a salary of £33,000, the average in the UK, will be paying the equivalent of a basic rate of 22 per cent.
Implication of the Autumn Statement's tax freezes
Salary now | Total income tax paid with frozen thresholds until 2027/28 | Equivalent increase in headline tax rate |
Lower earner (£25k) | £18,484 | 3p on the basic rate (23%) |
Average earner (£33k) | £29,226 | 2p on the basic rate (22%) |
Middle earner (£50k) | £58,864 | 3.5p on the basic rate (23.5%) |
Higher earner (£75k) | £126,000 | 3p on the basic rate (23%) AND 3p on the higher rate (43%) |
Source: AJ Bell
Head of personal finance at AJ Bell, Laura Suter, said: “Imagine the uproar and headlines if the government had increased the basic rate of tax from 20 per cent up to 23.5 per cent.”
She said not only would this break a Tory manifesto commitment, it would be much easier for voters to understand the “huge hike” in their tax bill in the next few years.
“Most taxpayers don’t understand how ‘fiscal drag’ works or the real impact of the frozen allowances, and the government is definitely banking on that fact.
"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.
In his Autumn Statement earlier this month (November 17), chancellor Jeremy Hunt extended the freeze on UK income tax allowances and thresholds until 2027/28, as the government looks to raise extra income to plug a hole in public finances of about £55bn.
Income tax thresholds were already frozen until 2026 under the previous chancellor, now prime minister, Rishi Sunak.
Once again, the “squeezed middle” are the impacted the worst, Suter said, with the impact of frozen allowances meaning those with salaries near the current higher-rate threshold are squeezed on both sides, getting less of their income tax free and seeing more of their income pushed into the higher-rate band.
“The result is the same as if thresholds were instead uprated to keep them out of the higher rate tax band, but the basic rate were increased to a whopping 23.5 per cent.”
sally.hickey@ft.com
