30million hit by stealth tax rises

Freezing tax thresholds will raise an extra £26bn a year and hit families on low and middle incomes

STEALTH hikes in income tax will hit at least 30million people and raise an extra £26billion a year.

Jeremy Hunt yesterday froze tax thresholds until 2028 in a move that will be his biggest single earner from the Autumn Statement, even though it is not an explicit increase.

Mr Hunt admitted in the Commons that his announcements would lead to ‘substantial’ tax rises for the country’s 30millionplus workforce.

The earnings threshold when people start paying the 20p rate of income tax, £12,570, and the level when the 40p tax rate kicks in, £50,271, will be frozen until 2028.

Close to six million people will be dragged into a higher tax bracket because of the frozen thresholds and rising wages, according to the Office for Budget Responsibility. The budget watchdog said 3.2million will pay income tax for the first time, while another 2.6million will be dragged into the 40p rate.

The OBR said: ‘The freezes are expected to raise £26billion a year by 2027-28 relative to thresholds being raised with CPI inflation.’

When former chancellor Nigel Lawson introduced the 40p rate of tax in 1988, it was paid only by the 1.7million highest-earning Britons. But by 2028 the higher and additional rates of tax will encompass 7.8million people – around a fifth of the workforce. The overall tax burden paid by families and businesses will rise to a post-war high of 37.5 per cent of national income, according to the OBR.

Commenting on the income tax thresholds, Tory MP Sir John Redwood, the former head of Margaret Thatcher’s policy unit, said: ‘I don’t welcome it and I hope it won’t be necessary. We need to send the right incentives and messages to people to get on in the world.

‘I want lower taxes, I’ve always said the lower the better. I think it’s a disincentive and it hits confidence and risk-taking, and we need more of that to offset the recession.’

Alex Henderson, tax partner at PwC consultants, said the changes were ‘seemingly technical and limited’ but they would have a ‘significant’ impact. He added: ‘Many more people will now find themselves caught.’

Luke Hildyard, executive director of the High Pay Centre, said: ‘The Budget will mean tax increases for those on low and middle incomes – many of whom have faced a decline in their real incomes.’

The changes to thresholds come at the same time as the national living wage is increased from £9.50 to £10.42 in April next year.

The change means that those on the minimum wage will start to pay income tax if they work a 24-hour week. Income tax thresholds were first frozen in spring 2021, and they

‘Send the right messages’

will remain at that level until April 2028. Experts said the £26billion figure raised from freezing income tax thresholds may be even larger if inflation is higher than forecast.

Torsten Bell, director of the Resolution Foundation, said it ‘may well raise even more than is pencilled in because these costings are based on us seeing negative or low inflation in 2024, 2025 and 2026’.

Mr Bell added: ‘If those average 2 per cent instead it will raise billions more.’

The Institute for Fiscal Studies economic think-tank, in its snap analysis of the Budget, added that although ‘using freezes to raise revenue can be politically easier’ it comes with ‘significant downsides’.

For example, the amount of tax raised from tinkering with thresholds can be uncertain when implemented over several years. Speaking

in the Commons after Mr Hunt’s statement, South Dorset Tory MP Richard Drax warned him against higher taxes, adding: ‘Can I just remind the House that it is the private sector and hard-working people through their taxes that pay for government expenditure?

‘Will my right honourable friend agree with me that raising taxes on both risks stifling the growth and productivity he and I both want?’