The current freeze on income tax thresholds has significantly increased the number of people paying tax for the first time. Of the total 17.9 million, 11.6 million will be affected during the final three years of the freeze (2025/26 to 2027/28 tax years).
The analysis also reveals that 8.2 million of these individuals are over the age of 60. This suggests that those in receipt of pension income, including the state pension, will increasingly be forced to pay tax on their retirement income for the first time.
The freeze on income tax thresholds has not only exponentially increased the number of people paying income tax, but has also led to more people being taxed at a higher rates as their income grows while tax thresholds remain stagnant. By the 2027/28 tax year, an additional 12 million people will be higher rate taxpayers, and a further two million will pay the additional rate of income tax.
As the freeze continues, more people are moving up the income tax brackets. Of the 12 million of taxpayers who are expected to move into the higher rate of income tax, 8.2 million (68%) will do so in the final three years of the freeze. Similarly, 1.4 million (70%) of those moving into the additional rate tax band will do so in the same period.
Time will tell whether the Chancellor will allow these numbers to continue climbing, given the knock-on effect it is having on the spending power of UK households.
Rachael Griffin, tax and financial planning expert at Quilter, says: “The number of people expected to pay income tax for the first time, or at a higher rate, by 2027/28 is set to rise exponentially due to the continued freeze on tax thresholds. Initially introduced in the 2021-22 tax year until 2025-26, the freeze was expected to bring 1.3 million more people into paying income tax and one million more into paying at the higher rate. Now, however, the extended freeze until 2027/28, combined with higher wages, will see almost 18 million people paying income tax and 12 million paying at the higher rate.
“During the 2024 Autumn Budget, Chancellor Rachel Reeves stated that extending the freeze until 2030 would boost government coffers by billions of pounds. However, she also noted that it would hurt working people and go against Labour’s manifesto commitments, declaring there would be no extension. Instead, from 2028-29, personal tax thresholds would be uprated in line with inflation once again. Given the challenging fiscal position, there have been rumours that the Chancellor might backpedal and opt to freeze income tax thresholds until 2030. However, given the likely backlash and the government’s commitment not to raise taxes for working people, this seems unlikely.
“Regardless of any extension, the lengthy freeze is resulting in a significant tax rise by stealth. As incomes rise, including state pension income, more people are being dragged into paying tax for the first time or into higher tax brackets, a phenomenon known as fiscal drag. Even without an explicit tax rise, the government will continue to collect more from taxpayers each year by keeping thresholds static. What’s more, as the state pension rises while the personal allowance remains stagnant, many pensioners will soon find themselves having to pay back a proportion of their state pension. Strategic financial planning has never been more important. Some will be able to mitigate their tax burden with options such as salary sacrifice arrangements and increasing pension contributions, whereas retirees should explore how they are taking income to ensure they are not paying more tax than necessary.”
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