- Income tax bills set to rise by 11% this year, driven by the deep freeze on tax thresholds
- Higher rate tax threshold could be over £65,000 by 2027/28 without the freeze
- Someone earning £50,000 at the start of the freeze set to pay close to £15,000 in extra tax thanks to frozen personal allowance and higher rate threshold
Laura Suter, director of personal finance at AJ Bell, comments:
“The chancellor’s Spring Statement laid bare the tax raid that’s hitting workers, with the Office for Budget Responsibility forecasting the biggest tax take relative to the economy since World War Two. The government’s own figures show that the amount the nation is set to pay in income tax, outside of self-assessment taxpayers, is going to rise by almost 11% this tax year, compared to last tax year. It means the nation’s income tax bill will hit £260.3 billion for 2024/25.
“But that’s nothing when it’s put against the £310 billion taxpayers will shell out in income tax in 2027/28. The OBR stated that by 2027/28, tax as a share of GDP will have reached a historic high of 37.7%, with frozen income tax thresholds and rising wages a major factor behind the increase.
“There’s some relief for all our tax bills toward the end of the decade – the overall bill is forecast by the government to keep rising and hit £322 billion, although it drops as a share of GDP by 2029/30 after the freeze on income tax bands ends, meaning we can all earn slightly more before falling into the next tax band.
“But nothing can make up for the lost years where income tax bands have seen no inflationary uplift. Based on the latest OBR forecasts for inflation, by the end of the tax band freeze the personal allowance would have increased to £16,385 had it been increased with inflation, but instead it will remain stuck at £12,570 – almost £4,000 less. At the same time the higher-rate threshold would have risen to just over £65,500 by the 2027/28 tax year, more than £15,000 higher than the frozen band.
“The OBR has also boosted the forecasts for wage growth – which is good news for those in employment if it comes to pass, as they may see chunkier pay rises. But it’s also a boost to the Treasury, as they nab a healthy chunk of that pay rise in tax. In fact the OBR now forecasts that the Treasury will net an extra £49 billion in non self-assessment income tax and National Insurance receipts before the end of the Parliament, compared to its estimates in October.
“Labour promised not to increase rates of income tax in its general election manifesto and, if you stick to the letter of the law, they haven’t. But people are paying more in taxes, thanks to them continuing the Conservatives’ deep freeze on income tax bands.
“The freeze means higher tax bills for anyone who earns more than the personal allowance. A basic-rate taxpayer will pay almost £3,000 more in tax over the period of the freeze, assuming average wage increases during that time. That’s because had thresholds increased with inflation, more of their money would have been protected by the tax-free allowance. But with frozen tax bands they are dragged into paying 20% tax on more of that money.
“Someone with an income of £50,000 is hit even harder, because previously their wage increases would have remained under the higher-rate band. But the frozen allowances mean that pay growth results in them being taxed at 40% on a decent wodge of their income. It means they will pay almost £15,000 more in tax over the entire duration of the freeze.”
