Is Income Tax morphing into a stealth tax?

tiemadmin • 28 October 2024

It is rumoured that the Chancellor will delay any increase in the Income Tax higher rate tax threshold beyond the present April 2028 freeze.

The UK Income Tax higher-rate threshold was last increased in April 2021, when it was set at £50,270. This amount was intended to remain frozen through to April 2028, as announced in the 2021 Budget. Ordinarily, Income Tax thresholds adjust with inflation to maintain their purchasing power, but the freeze has introduced “fiscal drag,” where inflation pulls more people into higher tax brackets without actual increases in their purchasing power.

To counter the effects of inflation since 2021, the higher-rate threshold would need a significant uplift. As of April 2023, Consumer Price Index (CPI) inflation stood at around 23.82% from the 2021 baseline. Adjusting for this increase, the higher-rate threshold would need to rise to approximately £62,240 to match its original value in real terms. Without this adjustment, taxpayers face an increased tax burden, as more of their income falls under the higher 40% rate than it would have if thresholds were inflation-indexed.

This freeze is estimated to bring over one million additional taxpayers into the higher rate by 2028 and increase tax revenue without raising the nominal tax rates. The policy’s cumulative effect is substantial, especially in a high-inflation environment, making a case for future adjustments to reflect inflation if purchasing power parity becomes a policy goal.

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