Tax freezes will be a tax rise over time

This article is part of
Guide to the Budget

Tax freezes will be a tax rise over time
Credit: Matthew Lloyd/Bloomberg via Fotoware

While the Chancellor did follow the Conservative Party’s manifesto promise not to increase the rates of income tax, national insurance, pension tax relief and inheritance tax, the surprise inclusion in this “freeze” was capital gains tax, which many thought would be subject to large scale reform.

Saying that, the tax freezes have been seen as tax increases by stealth.

For income tax purposes, the tax free personal allowance, basic rate tax band and higher rate tax band will increase from April 2021 in line with inflation (£12,570, £37,700 and £50,270 respectively) but will then remain unchanged thereafter until April 2026.

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Les Cameron, head of technical at Prudential UK, says: “His higher rate liability isn’t as much as it could have been as the government raised the higher rate threshold keeping some of his money at 20 per cent. Next year as the thresholds are frozen all of the pay rise will be subject to higher rate tax.  

“The freezing of the income tax thresholds will only raise taxes for those who have an increase in salary that moves them across a threshold, that is, a non taxpayer starts to have some income in the basic rate band (at £12,570) or a basic rate taxpayer starts to have some income in the higher rate tax band (at £50,270).” 

The threshold for being subject to a child benefit tax charge (£50,000), a withdrawal of personal allowance (£100,000) and additional rate tax (£150,000) have always been frozen since they were introduced.

Cameron adds: “There is no actual history of inflationary increases to the rates bands and allowances, it has largely been policy decisions. The personal allowance increased substantially from 2010. It was at this point the withdrawal of personal allowance for those with income over £100,000 was introduced.”

Rebecca O’Connor, head of pensions and savings at Interactive Investor, says: “Tax freezes become tax rises because over time, wages and asset values tend to rise.

“Wage inflation is currently around 3 per cent. This means someone who was earning £49,000 would be earning £50,470 in a year. 

“This would push them over the threshold for higher rate tax, where anything you earn over £50,000 is taxed at 40 per cent instead of 20 per cent.” 

So on that £470 above £50,000 that they are earning, they would pay £188 tax instead of £94.

Richard Churchill, a partner at Blick Rothenberg, says: “If someone currently earns £25,000 and receives a £1,000 pay rise, this represents a 4 per cent pay rise and therefore their pay is broadly staying in line with inflation meaning what they can afford to buy remains unchanged. 

“However under the current rules all of the additional £1,000 will be subject to tax at 20 per cent and a further £200 in tax paid meaning their net money will increase by £800. For households this is the critical measure as it is their take home pay which is available to them to spend.”

Adam Dunnet, director at Zefra, says: The headlines suggest that the Chancellor has been generous in protecting people against tax rises, although once you scratch away at the surface, it becomes clear that the freezes – both to rates and allowances across the board – will serve as an effective way of appeasing public opinion while increasing tax revenues.