Income tax: Healey’s budget leaves thresholds frozen again. How much more will you pay?
Tax policy means freezes reduce take-home pay as earnings rise in line with inflation Income tax thresholds are set to remain frozen after John Healey’s first budget as chancellor.
By The Guardian
Income tax thresholds will remain frozen until 2031, meaning many workers could pay more tax as their earnings rise, despite no change to the headline tax rates.
The policy was retained after John Healey’s first Budget as chancellor on 28 October. The freeze had already been extended by his predecessor, Rachel Reeves, and was not changed in the Budget documents.
The tax-free personal allowance remains at £12,570. The higher-rate threshold remains at £50,270 for taxpayers in England, Wales and Northern Ireland. Income above that level is generally taxed at 40 per cent, while the additional 45 per cent rate applies to earnings above £125,140.
Thresholds are the points at which different rates begin to apply. When they rise with inflation, workers receiving pay increases can keep more of their additional income before entering a higher tax band.
With the thresholds fixed, pay rises can push more earnings into taxable income or into a higher rate. This effect is known as fiscal drag.
The policy means the tax burden can increase without the Government raising the basic, higher or additional income tax rates. People whose wages rise broadly in line with inflation may therefore see less of their increase in take-home pay.
The Office for Budget Responsibility has estimated that, had the personal allowance risen with inflation from 2021 and continued to do so until 2030-31, it would be about £4,900 higher. The higher-rate threshold would be around £20,100 higher under the same comparison.
The proportion of taxpayers paying higher or additional-rate tax is forecast to rise from 15 per cent in 2021-22 to 24 per cent in 2030-31 as a result of the freezes.
The current arrangements are due to continue until April 2031.