Tom Evennett, EY Partner, Private Client Services, comments on the proposed future tax freeze for income tax personal allowance and higher rate thresholds for four years from 2022/23:
“As part of the Chancellor’s self-proclaimed honest approach to the British public he confirmed that the freeze in income tax thresholds would come into effect from April 2022. This will act as a ‘fiscal drag’ for individuals as the thresholds for the basic rate and higher rate of income tax will remain frozen until April 2026. As such, any inflationary increases in individuals’ salaries will result in more of their salaries being taxed at the higher income tax rates.
“After the proposed rise in corporation tax in 2023, this is the biggest tax raising measure in the Budget and is anticipated to raise over £8bn in the 2025/6 tax year.
“This additional tax burden is likely to be borne by those with the broadest shoulders and is projected to rocket year-on-year with a four-year freeze, particularly if inflation creeps up to the Bank of England’s target rate of 2%. At this level of inflation and without the same personal income allowance and higher rate thresholds, the total tax cost for a middle earner over four years could be in excess of £500. This rises to over £2,500 for those on higher incomes.
“Many individuals employed in jobs not traditionally considered to be highly paid will fall into the band of higher income tax as the freeze on the higher rate threshold turns some blue collars white.”