As the Spring Statement is just days away, there are speculations of a further freeze to income tax thresholds. This follows Chancellor Rachel Reeves’ previous announcement in her Autumn Budget last year of a threshold freeze until 2028.
The concern with this threshold is its potential to push more individuals into higher tax brackets, which could adversely affect State Pension claimants. The full new State Pension is currently projected to increase to £11,973 annually from April, slightly below the existing tax threshold of £12,570.
If the State Pension continues to rise yearly while the tax threshold remains frozen, it will eventually surpass the threshold, potentially leading millions to pay tax on their payments.
The income tax threshold freeze has also sparked worries for those who might unknowingly be pushed into paying the higher rate tax threshold. This comes as HMRC data reveals that in the 2022/23 tax year, there were 5.1 million higher-rate taxpayers, an increase of 15.3%, or 680,000 more people, compared to the previous year. Just five years ago, the figure was at 4.2 million.
The current threshold for the 40% rate starts at earnings over £50,271 and has been maintained since the 2021/22 tax year, with plans to keep it until April 2028.
Typically, tax thresholds rise in line with inflation, but the current freeze means that as wages increase, individuals are being pushed into higher tax brackets due to “fiscal drag”. This increases Treasury revenue without changing tax rates.
By 2028, the number of higher-rate taxpayers is predicted to reach nine million, and potentially ten million by the end of the decade.
In the 2022/23 fiscal year, higher-rate taxpayers, making up 15% of all income taxpayers, contributed 35% of total income tax revenue. There was also a 9.5% rise in those paying the 45% additional tax rate on earnings over £125,140, with 600,000 individuals in this bracket, accounting for 2% of taxpayers but 34% of income tax revenue.
Meanwhile, keeping the personal allowance threshold at £12,750 drew 1.5 million people into the tax bracket in 2022/23. It remains to be seen whether Ms Reeves will extend the tax threshold freezes; the government will reveal its plans in the Spring Statement on March 26.
