We will all suffer a severe case of fiscal drag when the new tax year begins on 6 April. It’s the ultimate stealth tax, which will take an extra £33 billion from us before it ends. Fiscal drag means raising more tax just by standing still: this year tax allowances – the amount of income we can have each year before tax is due – are frozen, and will be frozen every year up to and including 2025/26.
Normally, allowances increase each year with inflation. This year, that would have meant a rise in the level where income tax begins, from £12,570 to £12,960. The freeze means you’ll pay tax on £390 of income that wouldn’t have been taxed if the allowance had risen as usual. That will cost you £78, and so it will go on for the next three tax years. It will also mean an extra 1.5 million low-paid people will pay some income tax.
The level at which higher-rate tax begins is also frozen, at £50,270. As wages rise, a million more people will pay 40% tax on some of their
income by 2026. Scotland sets some of its own thresholds; the higher rate of Scottish income tax is 41% on earnings, pensions and rental income above its frozen threshold of £43,663 in 2022/23. Two lower thresholds will rise slightly.
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As announced in the Chancellor’s spring statement, all other UK personal tax allowances and thresholds are frozen too: an extra 16,700 estates will pay Inheritance Tax over the next five years for that reason, and an extra £3 billion will be raised from higher tax on dividends. However, National Insurance Contributions will be cut for most people from July. Although the starting rate goes up from 12% to 13.25% on wages over £190 a week from April, that threshold will rise to £242 from July – which will save workers £330 over 12 months. The rate on
earnings over £50,270 rises from 2% to 3.25%.
Paul Lewis presents Money Box on Radio 4. QUESTIONS? Send any questions to Paul.Lewis@radiotimes.com. Paul cannot answer you personally, but I will reflect them in his column.