Stealth tax raid will drag millions into higher rates

Chancellor confirms predecessor’s freezing of thresholds will be kept in place for two more years

MILLIONS of workers will be dragged into higher tax bands and thousands more families forced to pay death duties after a stealth tax raid was confirmed by the Chancellor.

Jeremy Hunt has frozen income tax, National Insurance and inheritance tax thresholds for a further two years, until 2027-28, extending the move Rishi Sunak imposed as chancellor in his March 2021 Budget.

This means the levels at which they begin to be charged will not increase in line with inflation, so workers given pay rises will be tipped over into paying higher rates. Families inheriting money will also be stung as the value of the estates being passed on to them rises.

The Treasury expects to raise an extra £1.26billion in the 2027-28 tax year by maintaining the thresholds for income tax and National Insurance at 2023-24 levels, and a further £35 million in inheritance tax. That is on top of the billions of pounds in extra tax already forecast to be paid by workers and people receiving inheritances under previously announced freezes to the thresholds.

Millions will pay income tax for the first time or be pulled into paying the higher rate of 40p per cent as a result of the freeze. Since 2019-20, the number of people being drawn into paying higher-rate tax of 40 per cent has already leapt by 44 per cent to 5.5million due to the stealth move.

The Centre for Economics and Business Research (CEBR), a think tank, recently forecast that the prolonged freeze will drag 4.2million extra workers into the 40 per cent tax rate by 2028. This will be double the number of higher rate payers since 2021.

John O’connell, of the Taxpayers’ Alliance lobby group, said freezing thresholds will mean “any hard-fought pay rises will go straight into the Chancellor’s pocket”.

A worker on £50,000 will take the biggest hit, according to stockbroker AJ Bell, paying £6,570 more in income tax over the course of the five-year freeze – a 14 per cent increase in their income tax bill. The freeze will cost a worker earning £33,000 an additional £2,557 – a 10 per cent increase – and £12,783 for a worker on £75,000, increasing their bills by 12 per cent over the five years.

Mr O’connell said: “Politicians must stop using smoke and mirrors to fleece working taxpayers for more of their hard-earned money.”

Steven Cameron, of the pensions company Aegon, said: “Freezing thresholds may be a ‘hidden’ way of raising more tax revenue, and less transparent than an increase in the rates of income tax.

However, the irony is that for low and modest earners, such a freeze could lead to them paying more in income tax than an increase of say 1 per cent in the basic rate.”

The Chancellor said those with “the broadest shoulders” would be asked to contribute a greater share to public finances. But tax freezes will hit lower and middle-earners too.

The CEBR also calculated that keeping the personal tax-free allowance at £12,570 would pull 5.8million more earners into the 20 per cent basic-rate bracket – a rise of 18 per cent on the 32.2million that paid the rate last year.

More families will also pay inheritance tax as the “nil-rate” band also remains unchanged at £325,000.

Joe Cobb, of law firm JMW, said the nil-rate band was worth a “fraction” of what it was when the threshold was first introduced in 2009. According to the Bank of England’s inflation calculator, £325,000 in 2009 would cost £473,784 in today’s money.