If Hunt and Sunak keep income thresholds frozen for five years average earner to be £2,000 poorer

2 November 2022

New calculations* from Quilter, the wealth manager and financial adviser, show that if wage growth is on average 5% per year for the next five years but income tax thresholds remain frozen then someone earning £35,000 today will be £695 worse off in the 28/29 tax year and cumulatively £2,016 poorer over the five-year period.

Similarly, if you earn £50,000 today, then you will be £3,403 worse off in the 28/29 tax year and in total be £9,765 poorer over the five-year period.

The freeze to the income tax thresholds up to and including the 25/26 tax year was announced during the budget in March 2021, by the then chancellor Rishi Sunak, who is now prime minister.

Over the past 20 years average wage growth per year has been closer to 3% per year. However, with inflation now in the double digits it is likely to be higher over the next few years.

Even with wage growth of just 3% per annum for the next five years someone earning £35,000 today would still be £400 worse off in the 28/29 tax year and £1,178 poorer over the five-year period if income tax thresholds remain frozen.

And with 3% wage growth someone earning £50,000 would be £1,939 worse off in the 28/29 tax year and £5,592 poorer over the five-year period.

Shaun Moore, tax and financial planning expert at Quilter says:

“These calculations illustrate the power of fiscal drag and how freezing income tax thresholds is a form of stealth tax. Ultimately, if thresholds remain frozen for a number of years, then you will end up paying considerably more tax. Thresholds at present are meant to remain frozen until 2026 but with the cost-of-living crisis weighing heavy on government spending this could be extended.

“As Sunak takes office, he has made it clear that he will not follow the low tax policies of his very short-lived predecessor, Truss. It is therefore likely that Sunak and Hunt in their Autumn Statement in November will seek to tighten the government’s belt so it is unlikely we will see these frozen thresholds thaw anytime soon.

“The new tax-year presents no better time to plan for efficient use of allowances for the tax-year ahead. If you are unsure about where to start, a financial adviser can help you identify how to make better use of the tax allowances available to you and while April may feel like a long time off it is worth starting to think about this sooner rather than later.”

*These calculations assume that wage growth increases by 3 and 5 per cent per annum and compares the tax paid if current bands remain frozen against the tax paid if the personal allowance, the basic rate band, the £100k personal allowance taper limit and additional tax rate band all increase in line with wage growth.