The chancellor has extended the freeze on UK income tax allowances and thresholds until 2027/28.
In his Autumn Statement this morning (November 17) Jeremy Hunt said income tax thresholds will remain as they are 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.
Doing this will pull more people into the income tax system for the first time, or into higher tax bands over the years, as wages increase under record inflationary pressures.
The Institute for Fiscal Studies has previously said this move could raise £30bn a year by 2026 because of the impact of high inflation.
Previous analysis by AJ Bell found this measure could cost the average earner nearly £2,600, with the biggest squeeze faced by middle earners, with those on a £50,000 salary due to pay an extra £6,570 in income tax over the period compared to a system in which income tax thresholds matched inflation.
AJ Bell found an average earner with a salary of £33,000 in 2021/22 before the income tax threshold freeze began will end up paying £27,378 in income tax if the policy is extended to 2027/28.
They would pay just £24,821 if income tax thresholds were linked to inflation over the same period, a difference of 10 per cent.
Hunt is considering tax rises and public spending cuts as he seeks to fill a gaping hole in public finances.
Hunt also announced that the point at which the highest earners start paying the top rate of tax is being lowered from £150,000 to £125,140.
Another threshold that has been frozen is inheritance tax, which is currently a 40 per cent tax on any estate above £325,000 (known as the nil rate band).
Those with children or grandchildren that pass on the family home benefit from an additional ‘residence nil-rate band’, which increases the £325,000 allowance to £500,000.
When he was chancellor, Sunak froze the threshold at £325,000 until April 2026. This has today been extended to 2028.
According to experts, this means more people will have to pay IHT as more estates are above the tax threshold due to rising house prices.
Linda Wallace, director of Wesleyan Financial Services at Wesleyan Group, said: “Inheritance tax has once again been raided for the Treasury’s coffers. The threshold for paying inheritance tax has been frozen since 2009. Not only does this mean it has not kept pace with inflation but, owing to rising property prices, more and more people are falling within its grasp.
“While £325,000 may sound a lot, those who own property are likely to find they are close to, or exceed this limit, and may not be able to leave their loved ones as much as they’d hoped when the time comes. There are ways to gift some money tax free, and making the most of these allowances is the only way to reduce the eventual tax burden.”