Why does freezing tax thresholds cost me money?published at 19:02 GMT
One of Rachel Reeves’s main announcements was that income tax thresholds will be frozen until April 2031.
That means more workers will pay more tax. But why?
Take someone on a £50,000 salary. At the moment, their first £12,570 has income tax of 0% (the personal allowance). The rest of their salary has income tax of 20%.
If their pay keeps pace with the current rate of inflation, their salary will be almost £60,000 in five years’ time.
So – in real terms – their pay won’t have risen, because it has only matched inflation.
But their tax bill will have increased in real terms. The 40% tax rate begins at £50,270, so in five years’ time they will pay that higher rate on almost £10,000 of their income.
At the moment, they don’t pay the 40% rate at all.
It’s not just people whose wages are near a threshold who will be affected. Anyone who pays income tax, who then gets a pay rise, will lose more of their pay, compared to if thresholds rose with inflation.
And about a million people who don’t earn enough to pay income tax now will start paying income tax when their earnings inch above the £12,570 threshold, according to the IFS. Read our full explainer here.
Scotland sets its own income tax bands and rates, but the personal allowance is set in Westminster. You can read more about the impact in Scotland here.
