The recent Budget did not introduce a rise in income tax rates, but it may still result in increased tax bills for many taxpayers before the end of the parliamentary term. The Chancellor has decided to freeze tax thresholds for an additional three years. These thresholds determine when individuals begin to pay tax and when they move into higher tax brackets. This approach is often described as a “stealth tax,” as the changes are not directly visible on payslips.
Individuals whose incomes hover near these thresholds will be most affected, particularly if they receive a pay rise, as more of their income will be subject to taxation. Approximately one million people who currently do not pay income tax may be required to do so if their earnings exceed the £12,570 threshold, which includes some state pension recipients and part-time minimum wage workers.
In Scotland, the tax-free allowance is also being frozen, though the tax bands differ from those in the rest of the UK. Additionally, the National Insurance Contributions threshold is being similarly frozen, leading to an increase in tax liabilities for many.
Under usual circumstances, wages typically increase annually to account for inflation. However, with the thresholds frozen, as wages rise, a larger portion will be subject to tax, potentially resulting in higher tax payments—e.g., a minimum wage worker could pay £137 more per year by 2030.
The frozen thresholds may also push more taxpayers into the higher tax bracket. Projections indicate that nearly one-quarter of taxpayers could find themselves in the higher 40% tax bracket by 2031 due to this policy.
The government has maintained this approach for over a decade, leading to significant increases in tax contributions, expected to reach £56 billion by 2031. Current estimates suggest that tax thresholds may begin to rise again after 2031.
Source: https://www.bbc.com/news/articles/clydn7r5pn1o?at_medium=RSS&at_campaign=rss