Labour’s hidden tax raid to punish high earners and squeeze middle Britons | Personal Finance

New analysis warns that any decision in next week’s Budget to continue freezing tax thresholds could cost people on high incomes £16,500, while also putting pressure on people on average incomes.

The last Conservative government froze tax thresholds for all workers from 2021-22 to 2027-28, but Chancellor Rachel Reeves is rumored to be planning to extend this for a further two years.

The freeze means the income threshold at which people start paying tax remains at £12,570. Tax is then paid at a rate of 20 per cent on income between £12,571 and £50,270; 40 percent – from £50,271 to £125,140; and 45 per cent above £125,140.

The freeze effect means that each year, as incomes rise, more people are forced to pay taxes or pay higher tax rates in a process known as the fiscal drag.

It is estimated that extending the freeze for a further two years will generate around £7bn a year for the Treasury without the need to increase the main rates at which income tax is charged.

Analysis by The Telegraph suggests that the effect of extending the freeze for two years, rather than raising tax thresholds in line with wage increases, would cost a person earning £70,000 about £8,266 a year.

For someone earning an average salary of £43,200 this year, extending the freeze on tax thresholds would cost around £1,654 a year.

In addition, a Bank of England expert warned that freezing tax thresholds, which takes money out of workers’ pockets, has become an important factor holding back the growth of the UK economy.

Catherine Mann, an external member of the Bank of England’s Monetary Policy Committee, said middle-income people were hit hard by the effect of income tax and national insurance thresholds set in monetary terms, in addition to higher income levels. mortgage costs and consumer prices.

“This middle-income group is especially important. They were relatively more subject to changes in the tax scale. Inflation has moved most of this group’s income into higher tax brackets. This is an important factor for purchasing power in the current environment,” she said at the IMF’s annual meeting in Washington.

Katherine Mann said she was not commenting on the Oct. 30 budget, where Reeves is expected to extend the freeze. But she said the central bank had identified the existing freeze as a “significant headwind” to growth, and in its latest forecasts for the UK economy, published in August, highlighted fiscal policy as “an important ingredient in the slowdown in economic activity associated with this forecast”.

She added that this is one of the reasons why UK growth prospects remain “fairly modest” even after an upgrade this week by the IMF, which now expects UK GDP to grow 1.1 percent in 2024, up from 0.7 percent previously and 1.5 percent in 2025.

Mann said: “Consumer behavior really is the backbone,” and noted that middle-income households in the UK are still saving more than before because they have been hit by the impact of the economic crisis. cost of living crisis.

Because the “fiscal burden” does not involve a change in key rates, it generally does not provoke the public resistance caused by more explicit tax increases.

However, the UK tax freeze is forcing more people to pay income tax. Two thirds of adults will pay income tax in 2027-28, up from 58 per cent before the tax freeze, according to the Institute for Fiscal Studies think tank. The number of people paying higher income tax rates has more than doubled since 2010.