There have been reports that Chancellor Rachel Reeves will extend the freeze on Income Tax thresholds in the upcoming Budget on 30 October.
While Labour has promised not to raise the Income Tax rates themselves, freezing the thresholds until 2030 still packs a punch for taxpayers – a move critics are calling a ‘stealth tax.’
What is happening with Income Tax?
At the moment, the Income Tax thresholds look like this:
These thresholds have already been frozen until 2028, but the Chancellor is expected to add another two years, keeping them fixed until 2030.
The hidden cost of fiscal drag
By keeping the thresholds frozen, more people will find themselves moving into higher tax bands as their wages rise.
This effect is known as fiscal drag, and it is already pulling many into paying more tax.
According to the Institute for Fiscal Studies (IFS), if the freeze continues, around 400,000 more people could start paying Income Tax, with 600,000 others ending up in higher tax brackets.
How does this affect individuals?
For the average taxpayer, fiscal drag means:
How does this impact businesses?
Businesses are not off the hook either.
Although fiscal drag mainly targets individuals, companies will feel the knock-on effects:
What can be done to ease the impact of fiscal drag?
While the tax freeze is out of your hands, there are some ways to soften the blow:
Not breaking promises?
The Government has suggested that this freeze doesn’t break Labour’s manifesto promise, as they committed not to raise Income Tax rates, but said nothing about the thresholds.
The extension could bring in around £7 billion per year for the Treasury by 2030, which would go a long way towards plugging the UK’s £40 billion fiscal gap.
For more information on how this could affect you or your business, get in touch with our team for expert guidance.