The size of the UK’s “stealth tax” threshold freeze will almost treble to £25bn by 2027-28, according to a think tank.
Chancellor Jeremy Hunt is freezing the income tax personal allowance at £12,570 and the threshold for the higher rate of income tax at £50,270 — instead of uprating them in line with last September’s inflation figure of 10.1%.
Next year’s freeze alone is set to raise £12bn a year by the time of the final freeze in 2027-28, the Resolution Foundation said.
These thresholds have now been frozen since 2021-22, and are set to remain frozen until April 2028. That six-year freeze is set to raise £25bn by 2027-28 — almost triple the £9bn forecast when it was announced in March 2021 and extended by a further two years in the 2022 Autumn Statement.
In a report, Resolution Foundation said: “Perhaps the most important piece of personal tax policy in 2023-24, though, is the decision not to raise the starting point for income tax and personal national insurance, nor the higher rate threshold.
“These remain frozen at £12,570 and £50,270 respectively, and are set not to rise before April 2028.
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“If the usual CPI (Consumer Prices Index) uprating had happened this April, then those thresholds would be rising by 10.1% to £13,840 and £55,340.
“For a basic-rate paying employee, that change would have been worth just over £400 (including national insurance, or £250 without), while a higher-rate payer would have gained over £900 overall.”
Still, many benefits and the state pension are rising by 10.1% in the new tax year.
More than 8 million households receiving means-tested benefits will also benefit from enhanced cost of living payments in 2023-24, worth £900 over the next year.
Pensioners and those receiving disability benefits will see their additional payments repeated in 2023-24 and many workers will benefit from a 9.7% rise in the National Living Wage from April.
These increases will be crucial for low-income households to cover rising costs, the think tank said.
Adam Corlett, principal economist at the Resolution Foundation, said: “High inflation has pushed up the projected revenue take from the government’s personal tax threshold freeze to £25bn a year — almost triple the amount forecast when the freeze was introduced. But higher-income households will be the ones most affected by next year’s major tax rises.
“High inflation also means benefits are being uprated by 10.1% in April, which will boost low-income households’ finances, although benefits are only set to fully catch up with price rises after April 2024’s uprating.
The average B and D council tax bill in England will rise by 5.1% in April, equivalent to £99, while low-income households that rent remain under pressure from the continued freeze of the local housing allowance.
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The dividend allowance is falling from £2,000 to £1,000 and then £500 next year and the capital gains tax annual exempt amount is falling from £12,300 to £6,000 and then £3,000 next year.
Resolution Foundation said that, taken together, the tax and benefit changes taking place from April will provide significant support for lower-income households during the cost of living crisis.
The poorest tenth of the population are set to gain £500 on average next year, compared to a loss of £100 for a typical household, and a loss of £1,500 for the richest tenth.
Corlett added: “The myriad of tax and benefit changes introduced this April highlight the challenges of such a patchwork approach to policy, which relies on short-term support schemes, stealth tax rises, and an unfair council tax system. Difficult decisions on tax and spending policies lie ahead, but policymakers should be honest with voters about the trade-offs of these decisions.”
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