Millions paying more under Jeremy Hunt’s allowance freeze
Chancellor Jeremy Hunt announced the extension of the freeze on the income tax allowance threshold as part of his Autumn Statement last year. As a result of this decision, the allowance is remaining at its current rate until 2027/28 which many believe will result in taxpayers paying more.
Currently, workers on a lower income pay 32 percent in tax on any money they earn over the tax allowance, which stands at £12,570.
Some 20 percent of this levy goes towards income tax, while 12 percent for National Insurance contributions.
Those who are higher earners pay 42 percent on any income over £50,270 with those making over £150,000 a year getting a 45 percent income tax rate.
Income tax allowances have remained the same but this latest decision from Mr Hunt means the amount individuals will pay in tax will change over the next few years.
This is because of fiscal drag, which is the term tax thresholds remain while earnings rise with inflation.
Ahead of the Spring Budget, Jon Greer, the head of retirement policy at Quilter, called on Mr Hunt to consider reversing the freeze on tax allowances as the economy shows signs of slight improvement.
He explained: “Following the mess of the mini budget in October, it was clear that Jeremy Hunt needed to steady the ship and navigate out of the very choppy waters created by Truss.
“It was therefore understandable at that point that a whole raft of frozen thresholds was put into place with some stretching as far as 2028. However, we are now hopefully living in a more predictable era.
“The economic outlook while still bleak for the time being is not as catastrophic as first thought.”
The latest inflation figures show the rate easing to 10.1 percent, which is the third consecutive monthly decline.
However, this remains extremely high and households are already having to contend with rising energy prices.
As such, Mr Greer believes ending the freeze on tax allowances would provide much welcome relief to vulnerable households.
The pensions expert cited a Freedom of Information (FOI) request carried out by Quilter to HM Revenue and Customs.
The query found that HMRC forecasts nearly 1.5 million more people will be dragged into higher tax bands by 2027.
Some 1.13 million of these people will become higher-rate taxpayers and these people may not feel wealthier as their salaries have simply kept up with inflation.
According to the tax expert, the existing allowance rules under HMRC are “dragging” more and more people into paying more amid the ongoing cost of living crisis.
Mr Greer added: “Therefore, we should re-think some of the frozen thresholds with income tax levels particularly ripe for early reprieve.
“This means that in real terms their buying power remains much the same, yet their salaries are taxed much more.
“Understandably, the Government are keen to refill public coffers, but this should be balanced with a fair tax system that is not dragging more and more people into higher taxes.”
The Spring Budget is set to be outlined by Jeremy Hunt on Wednesday, March 15, 2023.
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