Britain’s £25bn stealth tax: Freeze on income tax bands will bring bumper sums to Treasury’s coffers

Britain’s £25bn stealth tax: Freeze on income tax bands will bring bumper sums to the Treasury’s coffers because of soaring inflation, think-tank says

  • Usually thresholds for tax rates would increase to account for impact of inflation
  • But Sunak froze the bands for four years in 2021 which will bring in bumper sums

A stealth tax will cost workers £25billion a year, nearly three times more than predicted, a think-tank said yesterday.

The freeze on income tax bands introduced in 2021 will bring in bumper sums because of soaring inflation, according to the Resolution Foundation.

Should be honest with voters 

Spokesman Adam Corlett urged politicians to be more honest about their tax and spending policies.

He added: ‘High inflation has pushed up the projected revenue take from the Government’s personal tax threshold freeze to £25billion a year – almost triple the amount forecast when the freeze was introduced.’

Normally the thresholds for tax rates would increase to account for the impact of inflation. But Rishi Sunak, as chancellor, froze the bands for four years in 2021.  And in November that freeze was extended to 2027/28.

Normally the thresholds for tax rates would increase to account for the impact of inflation. But Rishi Sunak, as chancellor, froze the bands for four years in 2021. And in November that freeze was extended to 2027/28

The initial freeze was expected to rake in £9billion a year by the end of the period. But a surge in inflation – now running at more than 10 per cent – means that more employees than expected are being dragged into higher income tax bands.

An estimated £25billion a year will pour into Treasury coffers by 2027/28.

The freezes mean the threshold for paying the basic rate of income tax at 20 per cent will remain at £12,570. And the 40 per cent rate of income tax will still be levied on incomes over £50,270.

In a further blow for those at the higher end of the pay scale, the threshold for the ‘additional rate’ of 45 per cent is set to fall from £150,000 to £125,140 while tax-free allowances for dividends and capital gains tax are cut.

Taken together the reduction in income tax thresholds and the dividend allowance will cost the top-earning 5 per cent of the population an average £2,000, or 1 per cent of income.

Council tax rises will also bite from this month, with the average Band D household facing a 5.1 per cent increase in bills, equivalent to £99.

However there will be more money for some, with most benefits and the state pension going up by 10.1 per cent. 

More than eight million households receiving means-tested benefits will enjoy enhanced cost of living payments in 2023/24 worth £900 over the year, according to the Resolution Foundation.

Mr Corlett said: ‘The myriad of tax and benefit changes introduced this April highlight the challenges of such a patchwork approach to policy, which relies on short-term support schemes, stealth tax rises, and an unfair council tax system.

‘Policymakers should be honest with voters about the trade-offs.’

n The economy grew by 0.1 per cent at the end of 2022, revised figures show. GDP was thought to have stagnated, with zero uplift in the fourth quarter.

But better than expected figures from telecoms, construction and manufacturing saw output marginally rise, the Office for National Statistics said.

Martin Beck of the EY ITEM Club forecasters said it was the latest in a run of positive surprises and suggests ‘a welcome degree of resilience despite pressure from high inflation and expensive energy’.

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