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Jeremy Hunt announced a range of fiscal measures in today’s Spring Budget but did not put forward any further hikes to income tax. Despite this, millions of people could be dragged into paying more as part of a “stealth tax raid” caused by a freeze on allowances.
In his Autumn 2022 Budget, Mr Hunt revealed that the income tax allowance threshold would remain frozen until the 2027/2028 tax year.
Prior to this, allowances for income tax were frozen at their current level until 2026 under Rishi Sunak’s tenure as Chancellor.
While not a tax rise in itself, with peoples’ wages rising and the allowance remaining the same over multiple years, workers are liable to be paying more out of their paychecks.
With this freeze, the average employees’ tax bill is due to increase by 3.1 percentage points in the headline rate of tax, according to AJ Bell.
Taxpayers paying more due to allowances being frozen and wages rising is referred to as fiscal drag.
Prior to the Budget announcement, Andrew Tully, the technical director at Canada Life, broke down what freezing the allowances means for taxpayers.
He explained: “Many income tax allowances are already frozen through to 2028, which will mean many people paying significantly higher income tax.
“Any further freezing of tax thresholds will leave millions out in the cold. Further increases to personal taxes by stealth will be deeply unpopular with an electorate struggling to balance household budgets.
“With an election around 18 months away, the Chancellor may want to consider the impact these are having on many voters in advance of the next general election.”
Currently, workers pay a tax rate of 32 percent which is separated into 20 percent for income tax and 12 percent for National Insurance.
The higher rate of income tax is paid by people with earnings between £50,271 to £150,000 at 40 percent.
Furthermore, the additional income tax is at 45 percent and is paid by those who earn above £150,000 but this is set to drop to £125,140 in April.
In 2022, regular wages in the UK rose by 6.1 percent. As a consequence of this, workers are at risk of being dragged into a higher band and hit with a “stealth tax”.
Sarah Coles, head of personal finance, Hargreaves Lansdown, highlighted why the pending changes to the additional rate tax band will be particularly costly for certain people.
The tax expert said: “It means anyone earning between the old threshold and the new one will lose an average of £621 a year and those earning over £150,000 will lose an average of £1,256.
“It’s expected to make the taxman an extra £420million in the tax year starting in April.”
More to follow…
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