The Treasury has appeared to rule out an income tax rise in the 26 November Budget, but extending the current freeze alone would add an extra £843 tax bill to middle earners over the next four years
Lowering and freezing income tax thresholds could leave a worker earning £44,000 up to £3,000 worse off, as the Treasury appeared to have dismissed an income tax rise in the 26 November Budget.
Quilter’s analysis reveals that extending the current freeze alone would add an extra £843 tax bill to middle earners over the next four years. This heightens existing concerns that extending the freeze on thresholds would impact higher earners, with workers on middle incomes also feeling the pinch.
An extension would exacerbate the ‘fiscal drag’, with thresholds for income tax drifting further from rates of inflation.
The current freeze on income tax thresholds has been in place since 2021, when Rishi Sunak was Chancellor and inflation was around 2.5 per cent, and is set to expire in 2028, as reported by City AM.
Shaun Moore, tax and financial planning expert at Quilter, said that lowering the thresholds would “compound the injustice” of fiscal drag, adding: “The idea of cutting income tax thresholds is essentially an attempt to pretend that the last few years of high inflation never happened. “.
“People have already been dragged into higher tax brackets simply because their wages have risen only to stand still in real terms.
“For many households that combination [of fiscal drag and lower thresholds] will feel incredibly regressive and make them poorer in real terms despite on paper having higher salaries.”
Anxiety surrounding the 26 November Budget has been cranked up to fresh heights on Friday morning, after a Financial Times report revealed that Rachel Reeves has ditched plans to directly raise income tax and is instead choosing a selection of more covert tax increases. .
The Guardian’s Pippa Crerar has indicated that there wasn’t the political appetite to force such an obviously manifesto-busting policy through Cabinet and Labour MPs. .
Moore commented on the decision: “Reeves might think this move side steps more criticism but it is likely to do the opposite. Instead the idea of a ‘smorgasbord’ of tax changes introduces yet more complexity to a tax system already plagued with it.”
He condemned the possibility of additional threshold freezes as a “blunt and opaque tool and risks eroding trust in the tax system at a time when the public expects clarity and honesty about the fiscal choices ahead”.
