Stealth Tax Rise Looms for Millions of Workers
The Treasury has signalled it will not implement a direct income tax rise in the upcoming Budget on 26 November. However, financial experts are sounding the alarm over a more covert method of increasing the tax burden: extending the existing freeze on income tax thresholds.
Analysis from wealth manager Quilter reveals that a worker earning £44,000 could be left £3,000 worse off if thresholds are lowered or frozen for longer. The firm calculates that simply extending the current freeze alone would add an extra £843 to the tax bill of an average middle earner over the next four years.
The Mechanics of Fiscal Drag
This policy exacerbates a phenomenon known as 'fiscal drag'. This occurs when tax thresholds remain static while wages increase with inflation, slowly pulling more people into higher tax brackets or making them pay more tax on a larger portion of their income.
The current freeze was initiated by Rishi Sunak in 2021 when inflation was around 2.5 per cent and is scheduled to end in 2028. Extending it would mean thresholds drift even further from the reality of today's higher inflation, effectively acting as a tax rise by stealth.
Expert Condemns 'Injustice' of Threshold Changes
Shaun Moore, a tax and financial planning expert at Quilter, strongly criticised the potential move. He stated that lowering thresholds would "compound the injustice" of fiscal drag.
"The idea of cutting income tax thresholds is essentially an attempt to pretend that the last few years of high inflation never happened," Moore said. "People have already been dragged into higher tax brackets simply because their wages have risen only to stand still in real terms."
He warned that for many households, the combination of fiscal drag and potential new threshold changes would "feel incredibly regressive and make them poorer in real terms despite on paper having higher salaries."
The anxiety around Chancellor Rachel Reeves's first Budget intensified after a Financial Times report indicated she has abandoned plans for a direct income tax hike. Instead, the government appears to be favouring a 'smorgasbord' of less obvious tax increases.
Moore warned that this approach introduces "yet more complexity to a tax system already plagued with it" and described additional freezes as a "blunt and opaque tool" that risks eroding public trust.
