Stealth tax raid looms
FIVE-MINUTE GUIDE TO... FISCAL FREEZE
CHANCELLOR Rishi Sunak is under pressure to scrap the 1.25 per cent National Insurance hike in his Spring Statement onwednesday – but another stealth tax is set to cause almost as much damage.
In his Budget last March, Sunak froze income tax thresholds at their current level for five years, until 2025/26.
It means the personal allowance will remain frozen at £12,570 in that time, while the higher rate 40 per cent tax bracket will be fixed at £50,270.
As wages rise, the self-employed and employed will steadily hand over more money to HM Revenue & Customs, in a move the Institute for Fiscal Studies initially reckoned would cost taxpayers a total of £8billion a year by 2026.
Last week, it upgraded its estimates to an incredible £20.5billion a year, calculating that high inflation will drive up wages far over the frozen thresholds.
That’s on top of the estimated £13billion boost from the NI levy, and spells yet more bad news for 32.5 million taxpayers who now face a “horrible” stealth tax raid, said Hargreaves Lansdown senior personal finance analyst Sarah Coles: “Freezing income tax thresholds in a time of wage inflation will have a far bigger impact than anyone imagined, hitting workers just as hard as the National Insurance hike.”
It means 1.95 million more lower-paid workers will start paying income tax for the first time, according to the Office for Budget Responsibility. Incredibly, 1.34 million will be dragged into the higher 40 per cent tax bracket.
This will cost people thousands of pounds they urgently need as the cost of living skyrockets. Coles calculates that a £30,000 earner will see their income tax bill rise by £180 to £3,660 from April 6, while their NI bill will jump £333 to £2,785.That’s £513 of salary straight to HMRC.
Someone earning £50,000 will hand over a total £1,100 extra in combined income tax and NI next tax year.
Over five years, the total extra tax take will be devastating, with the basic rate taxpayer handing over an extra £1,803 in total income tax and NI, while the higher rate taxpayer will fork out £3,895.
These figures assume their wages will rise by 3 per cent every year – in practice they could hand over even more as wage growth currently stands at 3.8 per cent.
Inflation may be working in Sunak’s favour in this instance, but it will work against him in another, said AJ Bell head of investment analysis Laith Khalaf: “Government borrowing is already eye-wateringly high, and higher interest rates only increase the cost of servicing that debt, quashing the Treasury’s tax windfall.”
Sunak is under huge pressure to help out an embattled nation onwednesday by scrapping the NI hike or cutting fuel duty, but he’s unlikely to scrap his income tax freeze, said Bestinvest managing director Jason Hollands.
This wasn’t the only tax threshold
Sunak froze last March, he also froze inheritance tax, capital gains tax and pension lifetime allowance until 2026.
Worryingly, tax freezes have a habit of lasting longer than expected. The inheritance tax threshold was originally frozen at today’s £325,000 way back in 2009.
So it will have been held at that level for an incredible 16 years, while property prices and share values have soared.
While he would be unlikely to freeze income tax thresholds for quite that long, in these strange times nothing can be ruled out.