Market News

BY Tim Wallace

An extra 920,000 people will be dragged into the higher 40pc income tax rate after Rachel Reeves extended a freeze on thresholds.

Workers will pay a further £12.8bn a year by 2030-31 as a result of the Chancellor’s shock decision to freeze tax thresholds for an additional three years beyond 2028, rather than the two that had been expected.

It means more than 8.9 million people will pay the higher rate of income tax at the start of the next decade, according to the Office for Budget Responsibility.

That is more than double the 4.4 million who were liable to pay 40p in the pound when the threshold was first frozen, at £50,270, under the Conservatives in 2021-22. In total the decade-long freeze is expected to rake in an extra £66.6bn per year from income tax payers.

The move will be especially controversial as Labour’s election manifesto vowed not to “increase taxes on working people”.

The Government had claimed its manifesto promise meant it would not increase National Insurance on workers, nor the basic, higher and additional rates of income tax, allowing it to freeze thresholds without strictly breaking its pledge.

However, economists from the Institute for Fiscal Studies have said that freezing thresholds amounts to a “huge tax rise” on workers.

The Resolution Foundation estimates the move will cost typical workers hundreds of pounds each per year.

“The latest three-year extension to income tax and National Insurance thresholds will cost the average pensioner £160 a year in 2030-31, a typical employee £220, a higher earner £660, and a very high earner £440,” said the Left-leaning think tank, which was formerly headed by Budget architect Torsten Bell.

“Very high earners are affected less because they already have no personal allowance.”

‘Least stealthy stealth tax’

Julian Jessop, at the Institute of Economic Affairs, said the freeze would harm growth and broke a key promise.

“The Chancellor has broken the promise she made last year by extending the freeze on income tax thresholds for a full three years. This is the UK’s least stealthy ‘stealth tax’, since everybody is talking about it,” he said.

Ms Reeves acknowledged the tax changes have “a cost for working people” despite Labour’s pre-election promises.

“I do recognise that freezing the income tax and NI thresholds does mean that we’re asking people to pay a little bit more,” she said.

Ms Reeves increased employer National Insurance rates last year, which the Chancellor claimed did not break Labour’s manifesto.

Meanwhile, the latest OBR analysis also reveals that more people on low incomes will be pulled into paying income tax as a result of the freeze.

It predicts that an extra 780,000 people will be pushed above the £12,570 tax-free threshold by the end of the decade.

It means 43.5 million will be liable for income tax in 2030-31, up from 33 million before the freeze took hold.

This includes anyone on the full new state pension, which is set to rise to above the income tax threshold in 2027.

The move is particularly painful for those whose earnings are not keeping up with inflation, yet have to pay a larger tax bill even as the spending power of their pay packets is already falling.

If the freeze had not been implemented, the OBR calculates that workers and pensioners would be able to earn £15,480 tax-free this year, rising to £17,490 by 2030-31. That would be worth almost £1,000 to the typical basic rate taxpayer.

Similarly the threshold for paying the 40p rate would have risen to £62,080 this year would be on course to hit £70,390 in five years’ time – worth up to £4,000 per affected taxpayer.

The Chancellor’s decision to freeze tax thresholds for a further three years is part of a £15bn raid on personal incomes.

As well as the extended freeze on income tax, the Chancellor has also put National Insurance thresholds on hold.

Ms Reeves’s Budget also revealed that a further £4.7bn will be seized from pension contributions by charging National Insurance contributions on salary sacrifice payments into workers’ saving pots.

The Chancellor also announced a £2.1bn tax raid on dividends, property and income from savings.

Currently, every penny of the £329bn raised in income tax goes on the nation’s £333bn welfare bill.

But Ms Reeves’s raid on workers means that the income tax bill will rise to £426.9bn by 2030-31, outstripping even the rapid growth in benefits spending, which will hit £406bn in the same year.

George Osborne, who served as Conservative Chancellor from 2010 to 2016, told the Political Currency podcast: “The headline really is that she’s increasing taxes to increase benefits”.