Fixing tax thresholds will raise £100 billion over the next five years
and we’re the ones paying it, says Paul Lewis
The Chancellor has announced massive tax increases over the next five years – without explaining what he was doing. In his Autumn Statement he used this bland phrase, “I am maintaining at current levels the income tax personal allowance, higher rate threshold, and the inheritance tax thresholds”, to sneak in tax rises that will raise nearly £100 billion for the Treasury over the next five years. And guess who will pay that? Us.
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The personal tax threshold is the amount of income you can have before income tax begins. It is £12,570 a year – about £242 a week – and was fixed there in 2021/22. This year it did not rise and now it will stay the same until the tax year 2027/28. That six-year freeze of the personal tax allowance is the longest since 1955, and the effect will be dramatic.
Tax thresholds should rise each year with inflation. So this year the allowance should have been £12,960 and next year it should rise to £14,270, but keeping it frozen will cost basic rate taxpayers an extra £340 that year. Over the whole period to 2027/28 they will pay an extra £2,600 in tax more than if the allowance had risen with inflation.
The threshold where a higher rate tax of 40 per cent begins is also frozen. It is currently £50,270 a year and there it will stay until 2027/28. In that year alone people on higher rate tax will pay an extra £2,800 tax. And as wages and incomes rise, the Office for Budget Responsibility estimates that 2.6 million more people will be paying 40 per cent tax on some of their income.
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Similarly, the starting level of Inheritance Tax has been £325,000 since 2009 and it will now stay frozen until April 2028. If it had risen with inflation, it would be £474,000 next April. As a result thousands more families will have to pay Inheritance Tax when their loved ones die, and the amount they pay will grow.
Sadly, these decisions seem unlikely to be changed. But at least when you feel poorer year by year you will now know why!
QUESTIONS? Send any questions to Paul.Lewis@radiotimes.com. Paul cannot answer you personally, but will reflect them in his column.