Stealth Tax: How a Freeze on Income Tax Thresholds is Impacting Your Paycheck

In a surprising economic twist, the chancellor has decided to freeze tax thresholds for another three years, marking a move that is likely to hit your wallet harder than a direct tax hike. While there has been no increase in the income tax rate, this decision is viewed as a stealth tax because it won’t show up explicitly on your payslip but will affect nearly everyone earning above the £12,570 threshold. As it stands, around one million individuals who were previously under the tax threshold may soon have to start paying income tax as their earnings increase, particularly impacting those living on the state pension and low-income earners.

The Institute for Fiscal Studies (IFS) cites that even part-time workers earning the minimum wage could find themselves liable for income tax. Furthermore, the National Insurance Contributions (NICs) threshold is also frozen, exacerbating the situation. This is particularly problematic as wages typically rise with inflation, meaning a larger portion of income will get taxed.

For example, if you’re earning the minimum wage full-time, projections suggest you’ll pay £137 more in taxes by 2030 compared to if the tax thresholds had kept pace with inflation. The situation worsens as the frozen thresholds pull more taxpayers into the higher 40% tax bracket as salaries increase. By 2031, nearly one in four taxpayers could be paying part of their income at this higher rate.

Additionally, the additional 45% tax rate will ensnare an expected 600,000 new taxpayers, affecting those with incomes over £125,140. Due to the cumulative effect of these frozen thresholds since 2021, taxpayers are already out of pocket by hundreds of pounds. If the current policies persist until 2031, this measure could result in an extra £56 billion in tax revenue, ultimately stunting disposable income and affecting the earnings that help fund public services such as the NHS and education. While it’s indicated that thresholds may resume increasing in 2031, the long-term implications and assessments on tax brackets remain contentious without clear principles on what the ideal personal allowance should be.