Warning millions of workers face £75billion stealth tax under Tory freezes

23 October 2023 , 08:49

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Millions of Brits set to pay 9p more in tax by 2027/28 (Image: Getty Images)

Millions of workers are set to pay 9p more in the pound on income tax due to the threshold freezes.

According to the economics think tank The Growth Commission, Brits will be paying £75billion more in income tax from 2027/28. The extra tax will come from the Government's six-year freeze on tax allowances and thresholds and is equivalent to workers paying 9p in the pound on income tax, reports This is Money.

The figure is also "significantly higher" than previous estimates and means the UK is on course for the "highest sustained level of tax revenues" as a share of the economy since the Second World War. The think tank, which was set up by former Prime Minister Liz Truss but works independently from them, noted that many voters are unaware they are worse off because headline rates have remained the same.

Income tax thresholds usually rise in line with inflation, however, since 2021 they have been frozen at their current level. Chancellor Jeremy Hunt has frozen the income tax personal allowance at £12,570 this year until April 2028. This is the level at which you start to pay tax on your earnings if you're a basic-rate taxpayer. You do not have to pay any tax on income below this level. He has also frozen when people start paying higher tax rates.

This means that as wages rise, more people will start paying tax and more will pay a higher rate of tax. The policy is known by economists as “fiscal drag” and is when tax thresholds do not keep up with the rising cost of living, pulling more people into higher tax brackets.

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Professor Douglas McWilliams, co-chairman of the commission, reportedly "condemns" the use of fiscal drag as a tax-raising technique, saying it amounted to "subterfuge". He said: "If you're going to put people's taxes up you should do it honestly and not use these stealth tactics like freezing thresholds. This is income tax money that the Government didn't expect to get because they predicted a much lower rate of inflation than it has turned out to be and because of that they should really be looking to hand some of it back."

Professor McWilliams also noted that the stealth jackpot would be "partially offset" by increased welfare spending and spiralling interest payments on the national debt. He added: "Spending is still getting out of control and debt interest is going to be higher."

Figures from Office for National Statistics (ONS) on Friday showed that tax receipts rose to £77.3billion in September. This is £3.4billion higher than the same time last year.

Ruby Flanagan