Millions of workers, savers and pensioners face a brutal assault with Rachel Reeves poised to extend hated ‘stealth raids’ in the Budget.
The Chancellor looks set to keep the long-running freeze on thresholds in place for another two years, despite humiliatingly dropping plans to increase income tax.
The policy would net the Treasury more than £8billion a year towards filling a gap in the finances believe to be between £30billion and £40billion.
But the boost to the government’s coffers would come at a huge cost for Britons, with more than 10million people facing paying the top rate of tax by the end of the decade.
The worse-off will also be hammered, with a full-time worker earning the minimum wage seeing their annual tax bill rise £137 relative to the current policy of increasing thresholds in line with inflation.
For the first time, all pensioners will be hit with tax on the full state pension in 2027-28 – so the state is effectively giving with one hand and taking with the other.
The IFS estimated that extending the freeze on tax thresholds would net the Treasury more than £8billion a year – but leave nearly one in five workers paying the higher rate
The Chancellor looks almost certain to keep the long-running freeze on thresholds in place for another two years, despite humiliatingly dropping plans to increase income tax
Allowing inflation and pay rises to erode the thresholds would mean significantly more people on lower incomes being dragged into the tax system
This chart shows how the real value of thresholds have been lowered by the freeze
Government sources insisted the extraordinary backtrack on the income tax increase last week was because forecasts from the OBR watchdog were slightly less bleak than anticipated.
However, Ms Reeves still seemingly needs to close a fiscal gap of up to £40billion on November 26, as she has committed to rebuilding ‘headroom’ that has been wiped out by jettisoning policies such as benefits cuts.
Economists have voiced alarm that she will now look at a ‘Smorgasbord’ of smaller tax increases to try to bail herself out of trouble. They will almost certainly include a new gambling levy and higher taxes on expensive properties, as well as per mile charges for EVs.
Treasury sources have played down the prospect of an outright cut in thresholds, but have admitted she still need to use ‘big levers’ to raise money. Final decisions are being taken over the coming days.
Meanwhile, keeping the savings allowance on hold could raise billions of pounds more for Ms Reeves.
The allowance has been frozen since it was introduced by then-chancellor George Osborne in 2016. Basic rate taxpayers can rack up £1,000 in savings interest tax-free, which falls to £500 for those on the higher rate.
Top rate taxpayers get no allowance at all.
The Centre for Economics and Business Research (CEBR) estimated that freezing the savings allowance for the next two years would raise £6.4billion £6.4bn a year by 2027-28.
The rise will be driven by further growth in earnings and savings levels, the think-tank told the Sunday Telegraph.
An Institute for Fiscal Studies report released last week found almost one in five taxpayers will be dragged into paying 40 per cent or more tax on their income.
Fiscal drag will mean even more of those in middle-class professions such as senior nurses, police officers and teachers pay the higher rate of tax.
More minimum-wage workers will be pulled into paying tax due to frozen thresholds and substantial minimum wage rises, it added. And it said that a continuing freeze would mean more taxpayers are eligible for Universal Credit at a time when the benefits bill is increasingly unaffordable.
All earners would be hit by a freeze extension, according to the IFS
Extending the freeze on thresholds, brought in by Rishi Sunak in 2021, for a further two years until April 2030 would net her £8.3billion that year, according to the think-tank.
That is on top of the £42billion the policy was already expected to raise by 2027-28, when it was due to end.
The IFS said that in 2022–23 just under half of those on the full new state pension were taxpayers.
But unless there is an exemption, all pensioners will be paying tax from 2027-28 – and might have to fill out tax declarations to HMRC.
