You have been warned - tax rises
Paul Lewis on why a tax freeze now means you will pay more in future
Good news: the amount of income tax you pay will fall slightly from April. Bad news: it’s barely enough to notice. If their income stays the same, basic-rate taxpayers will pay £14 a year less income tax and £6 less in National Insurance contributions. Higher-rate taxpayers will save £68 off their tax, but if they work and pay National Insurance, £20 of that will be clawed back.
In Scotland, it’s roughly the same for those on low incomes, but Scots on higher incomes will gain about £58 net. And now more bad news: after these slight increases in 2021/22 the allowances outside Scotland will be frozen for the next four years, with no rises until April 2026.
The personal allowance – the income you can have before tax is due – will stay at £12,570 throughout the UK, not rising with inflation, so that as your income rises each year the amount of it that is taxed will grow.
Outside Scotland the threshold where higher-rate tax (at 40 per cent) kicks in rises to £50,270 in 2021/22 but will then be frozen until the end of the 2025/26 tax year. The Institute for Fiscal Studies estimates that nearly a million more people will by then be paying higher-rate tax. In Scotland, higher-rate tax of 41 per cent will begin at £43,662. The Scottish Government has not yet said if it will freeze this allowance.
More like this
Just about all other tax thresholds are frozen at 2020/21 rates. The £325,000 main Inheritance Tax threshold and extra allowance of up to £175,000 if you leave your home to a descendant will not change.
One small upside is that the duty that’s part of the price of petrol, diesel, and alcohol is frozen, too (but there’s no commitment not to raise this in subsequent years).
This tax freeze will bring billions into Treasury coffers: the freeze in income tax thresholds alone will mean we are paying £8 billion a year more tax in 2025/26. There’s not much you can do about it, but at least you have been warned.
Paul Lewis presents Money Box on Radio 4