More tax for us all - as our pay and pensions rise, tax will be due on more of our income
The freezing of income tax allowances for a second year spells bad news, says Paul Lewis
We will all pay more income tax in the new tax year that begins on 6 April. Which may be a surprise, because the Chancellor did not mention that in his hour-long Budget speech last month. He didn’t need to, because he announced last autumn that tax allowances – the amount of income we can have before tax is due – would be frozen for five more years. So as our pay and pensions rise, tax will be due on more of our income, with no relief until April 2028 at the earliest.
It’s the second year in which income tax allowances have been frozen instead of rising with inflation as the law says they should. If Parliament had not overridden that law, we would be allowed income of £14,270 a year free of tax in 2023/24 instead of the frozen £12,570. Anyone whose income rises above that – which is £1,047.50 a month or £241.73 a week – will pay tax, in some cases for the first time. During the six-year freeze, 3.2 million people on low income will pay tax on it for the first time.
For example, people on national living wage who worked 25 hours a week in 2022/23 paid no income tax but will find this year that they are taxed on two of those hours. If they are under 66 they will lose nearly a third of those two hours’ pay to the Chancellor. Pensioners, pleased to hear their state pension will rise by a record £16.72 a week on average, may not realise a fifth of the extra will go back to the Chancellor in tax if their income now exceeds the tax-free allowance.
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Overall, basic rate taxpayers will be £340 a year worse off than if the normal rules had been followed, and the cost to higher-rate taxpayers will be even more. The latest estimate from the independent Office for Budget Responsibility is that frozen income tax allowances will bring in an extra £13.1 billion in 2023/24 and an extra £110.7 billion over the whole six years. No wonder Jeremy Hunt did not mention the big freeze in his speech.
The good news? Duty on petrol and diesel is also frozen at last year’s level, saving the average driver £100.
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