30 October 2024
If you are covering the budget and the government's decision not to extend the freeze on income tax thresholds, please see the following comment from Rachael Griffin, tax and financial planning expert at Quilter:
"Despite widespread speculation that Labour would break its pledge not to raise taxes for working people by extending the income tax threshold freeze beyond 2028, the Chancellor has confirmed the freeze will thaw as originally intended. Nonetheless, as wages grow in line with inflation, static tax thresholds will continue to drag more and more individuals into higher tax brackets until the end of the freeze and beyond, a phenomenon known as fiscal drag. For millions of middle-income earners, this means paying a higher proportion of their income in tax without seeing any real increase in their purchasing power.
"The OBR’s October 2024 economic and fiscal outlook suggests that from 2027-28 onwards, more than four million additional taxpayers will brought into tax due to the threshold freezes, resulting in the number of taxpayers surpassing 40 million for the first time. The OBR also suggests that the changes to income tax and NICs thresholds that have been announced since March 2021 onwards will mean the government’s yield will still increase by £48.0 billion in 2029-30 despite thresholds thawing from 2027/28.
"However, the decision not to extend the freeze will prevent approximately one million pensioners being dragged into paying income tax by 2030, according to our estimates.
"This freeze will continue to hit middle-income households the hardest, particularly those who are just nudged into the higher-rate tax band. Many of these workers are far from affluent, but they are facing tax rates more typically reserved for higher earners. At a time when inflation continues to erode real wages and the cost of living remains high, households will continue to take a hit on their disposable incomes. Families will feel the pinch, and many will struggle to maintain their living standards as more of their income is taxed at higher rates.
"By opting to maintain the freeze rather than adjust thresholds in line with inflation sooner, the government has ensured that the tax burden continues to rise for millions, despite their promise to the contrary. The result is a growing sense of frustration as workers see their tax bills grow without a corresponding improvement in their standard of living."
