High inflation has pushed the expected proceeds from the government’s personal tax threshold freeze to £25bn by 2027-2028, according to one think tank.
With the 2023/24 tax year beginning April 6, the Resolution Foundation analyzed the changes in personal income tax and allowances coming into effect.
The report said: “Perhaps the most important part of personal tax policy in 2023-24 is the decision not to raise the starting point for income tax and personal national insurance, nor the higher rate threshold.
“These remain frozen at £12,570 and £50,270 respectively and will not rise before April 2028.
“If the usual CPI (Consumer Price Index) upgrade had taken place in April, those thresholds would have increased by 10.1% to £13,840 and £55,340.
Perhaps the most important part of personal income tax policy in 2023-24 is the decision not to raise the starting point for income tax and national insurance, nor the higher rate threshold
“For an employee paying base rate, that change would have been worth just over £400 (including social insurance, or £250 without), while a higher rate payer would have gained more than £900 in total.”
The report looked at the potential difference in income tax and national insurance revenues, if the two main tax thresholds rose each year in line with inflation instead of being frozen.
It read: “The six-year freeze as a whole is now expected to raise £25bn in 2027-28.”
Many benefits and the state pension will increase by 10.1% in the new tax year.
More than eight million households receiving means-tested benefits will also benefit from improved cost-of-living payments in 2023-2024, worth £900 over the coming year.
Retirees and those receiving disability benefits will see their top-up payments repeated in 2023-2024 and many workers will benefit from a 9.7% increase in living wages from April.
These increases will be crucial for low-income households to meet rising costs Foundation said.
It said the average B and D council tax in England will rise by 5.1% in April, equivalent to £99, as low-income households renting remain under pressure from the ongoing freeze in local rent allowance.
Higher-income households will bear the brunt of April’s tax changes, according to the Foundation, whose work aims to improve living standards for low- to middle-income earners.
The starting point for the top income tax rate will fall from £150,000 to £125,140, while the dividend payment and annual capital gains tax exempt amount will be reduced.
The dividend payout drops from £2,000 to £1,000 then £500 next year and the annual capital gains tax exempt amount drops from £12,300 to £6,000 then £3,000 next year.
The reduction in income tax thresholds and dividend payments will cost the top 5% of the population an average of £2,000, equivalent to an income reduction of around 1%, the Foundation said.
The myriad of tax and benefit changes introduced in April highlight the challenges of such a patchwork of policies
The Foundation said the tax and benefit changes coming from April will together provide significant support to lower-income households during the cost-of-living crisis.
The poorest tenth of the population will earn an average of £500 next year, compared to a loss of £100 for an average household and a loss of £1,500 for the richest tenth.
Adam Corlett, chief economist at the Resolution Foundation, said: “High inflation has pushed expected revenues from the government’s personal tax threshold freeze to £25bn a year – almost triple the amount expected when the freeze was introduced.”
He added: “The myriad of tax and benefit changes introduced in April highlight the challenges of such a patchwork of policies, which rely on short-term support schemes, hidden tax increases and an unfair municipal tax system.
“Tough decisions on tax and spending policies lie ahead, but policymakers need to be honest with voters about the trade-offs of these decisions.”
The Liberal Democrats are calling for the energy price guarantee to be reduced to £1,971 and for the warm house rebate and winter fuel payments to be doubled.
This would be paid for through a windfall tax on the oil and gas companies and a tax on their senior executives’ bonuses, the party said.
Lib Dem spokesperson for Finance Sarah Olney said, “Now more than ever, hard-working people deserve a fair deal.”
A spokesperson for the Treasury Department said: “After borrowing £400bn to help the country through the pandemic and (Russian President Vladimir) Putin’s energy price shock, we have had to make some tough decisions to keep the country’s books in balance. balance and cut inflation in half this year.
“To help families with living costs, we are providing an average of £3,300 in support per household this year and next – funded by windfall energy gains.
“For the first time ever, people can now earn £1,000 a month without paying a penny of income tax and national insurance.
“Thanks to ten years of tax reform, we have saved a total of millions on paying taxes.”