MILLIONS of households could be worse off from a massive tax change in today’s fall statement.
Chancellor Jeremy Hunt will extend a freeze on income tax and national insurance thresholds until 2028.
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The freeze was supposed to end in 2026, but if it is extended, millions more people will have to pay a higher tax rate.
That’s because inflation and rising wages will lead to more workers reaching the thresholds, even if they are no better off in real terms.
Thresholds are usually adjusted to account for both.
This means that someone with an average UK salary of £33,000 will pay almost £2,600 more income tax thanks to the freeze.
And even more money will be added to tax bills if national insurance thresholds are frozen.
The basic rate of income tax currently starts on earnings in excess of £12,571, and the higher 40 per cent rate at £50,271.
And you pay the National Insurance if you are over 16 and:
- An employee who earns more than £242 per week
- Self-employed person and a profit of £6,725
This sneaky stealth tax is expected to bring in £30 billion a year by 2026.
A stealth tax is a form of tax that is collected in a way that is not obvious.
While the government won’t change the nominal rate, you end up paying more money.
It comes after the government enforced a reduction in the rate of national insurance contributions – with the average worker benefits from a £330 pay rise.
The cancellation of the 1.25 percentage point increase took effect on November 6.
The initial rise was part of the prime minister Rishi Sunak tax plan while he was chancellor.
How will the income tax freeze affect me?
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Easy said, inflation and wage increases will result in more people being dragged into higher ranks.
The inflation rate in the UK is currently at its highest level in 41 years of 11.1%, while the average total wage, including bonuses, has risen by 6% from July to September.
This essentially means that if wages rise steadily, it means that millions more people will become higher taxpayers and see some of their wages disappear.
Someone with the average UK salary of £33,000 will have to pay almost £2,600 more income tax as a result of the freeze – a 10% increase.
Those earning £50,000, just below the current higher interest rate threshold, will be hit hardest.
It is estimated that they will pay £6,570 more in income tax over the entire period of the tax freeze.
That represents a 17% increase in their income tax over that period.
The chancellor will also announce a pay rise for millions Universal credit and benefits next year, as well as a slew of them cost of living payments.