The Freeze In Tax Allowances For Four Years Will Eat Into Take Home Pay

15th February 2023

Have you reckoned on the fact that the freeze on tax allowances will eat your take home pay increasingly for four years.

This measure was announced at Autumn Statement 2022. Finance Act 2021 fixed the PA and basic rate limit at their 2021 to 2022 levels up to and including 2025 to 2026.

The four-year freeze to the personal allowance and higher-rate threshold (scheduled to run to March 2026) is expected to increase the share of adults paying income tax to 66% (35 million) and the share paying the higher rate to 14% (7.7 million), compared with 63% (34 million) and 11% (6.1 million) today.

Why is personal tax allowance frozen?
Income tax thresholds were already frozen until 2026 under the previous chancellor, now Prime Minister, Rishi Sunak. Doing this will pull more people into the income tax system for the first time, or into higher tax bands over the years, as wages increase under record inflationary pressures.

The FT Adviser
The Institute for Fiscal Studies has previously said this move could raise £30bn a year by 2026 because of the impact of high inflation.

Previous analysis by AJ Bell found this measure could cost the average earner nearly £2,600, with the biggest squeeze faced by middle earners, with those on a £50,000 salary due to pay an extra £6,570 in income tax over the period compared to a system in which income tax thresholds matched inflation.

AJ Bell found an average earner with a salary of £33,000 in 2021/22 before the income tax threshold freeze began will end up paying £27,378 in income tax if the policy is extended to 2027/28.

They would pay just £24,821 if income tax thresholds were linked to inflation over the same period, a difference of 10 per cent.

Hunt is considering tax rises and public spending cuts as he seeks to fill a gaping hole in public finances.
https://www.ftadviser.com/your-industry/2022/11/17/income-tax-bands-frozen-until-2028