The Chancellor committed to keeping basic and higher rate income tax rates at current levels but extended the threshold freeze to 2028
This means that the threshold for 20% base rate taxpayers will remain at £12,570 while higher rate 40% taxpayers will start paying at £50,270, frozen for two years longer than originally planned. Investec Wealth & investments estimates that 742,386 people could be pushed into a higher rate tax band from April 2023 as a result of pay rises and a freeze on income tax thresholds. The percentage of people in England and Wales in full-time work in the higher rate tax band is 19.6%, but this could rise to 22.3% by April 2023. ‘The current tax thresholds may push non-taxpayers into the basic rate tax bracket, including some two million more pensioners who will benefit from the state pension triple lock increase this year,’ said Faye Church, wealth manager at Investec Wealth & Investment. ‘In an environment of high inflation, those already struggling will feel the effects of fiscal drag, seeing a higher proportion of their income and wealth being taken by the taxman. Inflation could be the largest generator of tax revenue over the next five years.’ Fiscal drag is going to pull more people into higher rate tax bands over the next five years and is part of the Chancellor Jeremy Hunt’s plans to spread the costs across the working population primarily. Craig Hughes, private client tax partner at Menzies LLP, said: ‘This will increase taxes for the masses, regardless of their earnings.’ Rachel McEleney, associate tax director at Deloitte, said: ‘Although income tax liabilities appear to be flat for those earning less than £125,140, they are paying more tax than would otherwise be the case due to fiscal drag. ‘Assuming the Bank of England meets its inflation target of 2% per annum for the next four years, the personal allowance and higher rate threshold would ordinarily have reached £15,470 and £62,070, respectively, by 2027/28, absent the freezes announced in March 2021 and today. ‘This means that someone earning £25,000 per annum will typically be paying extra income tax of about £580 in 2027/28, while someone earning £65,000 will be paying about £2,940 more. The discrepancy will be greater if inflation is higher.’ Tom Evennett, EY UK&I family enterprise leader, ‘The personal tax announcement is forecast to raise one of the largest amounts for the Treasury and could have an indirect impact upon individual's wages, is the decision to hold the secondary threshold for employer national insurance contributions at the current level of £9,100 for the next five years. ‘As a result, the cost of employing people will rise as salaries increase but the threshold remains frozen for employer's national insurance contributions – this is expected to bring in an extra £25bn to the Exchequer over the next five years to 2027/8.