New analysis by the Resolution Foundation reveals that the freeze on personal tax thresholds and inflation will lead to an annual tax bill of £40bn for UK taxpayers by 2028. The policy will cause the country’s biggest tax rise in 50 years, with millions of people expected to be placed in a higher tax band leaving a greater proportion of their salaries taxed for those securing wage increases. This process is known as “fiscal drag” to economists. The government’s decision keeps the income tax and National Insurance thresholds frozen until 2028.
The Resolution Foundation, an independent think-tank focused on improving living standards for those on low to middle incomes has predicted that the government’s policy will increase tax income to £30bn by 2027-28, though they have studied the inflation forecasts of the Bank of England and suggest that estimate may grow to £40bn instead. This is largely due to inflation being higher than previously projected, meaning that the government’s income tax revenue will rise significantly as a result.
The government’s single biggest revenue source is income tax, and the basic rate is 20% meaning that 1/5th of the money people earn between £12,571 and £50,270 goes to the Treasury. Chancellor Jeremy Hunt extended the freeze on income tax and higher-rate thresholds until April 2028 in last year’s Autumn Statement and froze the main National Insurance and inheritance tax thresholds.
Abandoning the annual uprating of tax thresholds is a tried-and-tested way for a government to stealthily increase revenue. Adam Corlett, a principal economist at the think tank, says abandoning the usual uprating of tax thresholds was a “tried and tested way for governments of all stripes to raise revenue in a stealthy way.” He continues, saying that “But it is the far bigger than anticipated scale of the government’s £40bn stealth tax rise that stands out.”
A spokesperson for HM Treasury says that driving down inflation is the most effective tax cut the Government can deliver right now. They claim that despite the difficult choices made to restore public finances after the dual shocks of the pandemic and Putin’s illegal invasion of Ukraine, taxes remain lower in the UK than in any major European economy. The Chancellor has stated that he wants to lower the tax burden further but has been clear that sound money must come first
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