Stealth Tax Alert: How Freezing Tax Thresholds Is Shrinking Your Paycheck

In a shocking move, the Chancellor has decided to freeze tax thresholds for another three years, significantly affecting your future income. While there may not be an increase in income tax rates, this decision is poised to create a stealth tax that will hit unsuspecting earners hard. The freezing of thresholds means that as wages typically rise annually to keep pace with the cost of living, more of your salary will be pushed into taxable ranges without any visible increase in tax rates.

Approximately 1 million people currently earning below the tax threshold of £12,570 will now find themselves paying taxes on their income as they receive modest raises. This includes individuals living on the state pension, which is expected to edge close to the threshold next year, and part-time minimum wage workers. Additionally, the freeze on National Insurance Contributions (NICs) thresholds will also mean that more individuals will start paying these additional taxes sooner.

This stealthy approach is particularly damaging for those whose salaries rise with inflation. For instance, if a minimum wage employee sees an increase in pay by 2030, they could end up paying over £137 more in taxes than if the thresholds had been adjusted. The implications stretch further, as nearly one-fourth of all taxpayers may find themselves subjected to a higher rate of tax by 2031. If existing pre-freeze trends continue, many could find themselves paying taxes at rates of 40% or 45%, pulling more people into these higher brackets than before.

Since 2021, when the previous government last froze tax thresholds, taxpayers have already incurred hundreds of pounds more in taxes due to this policy. By 2031, estimates suggest that the freezing of these thresholds could result in a staggering £56 billion in additional tax revenue, funding essential services such as NHS, schools, and support for vulnerable populations.

While there’s a temporary expectation that thresholds might rise post-2031, the long-standing freeze highlights an inherent lack of fairness in the tax system, where individuals’ wages and living standards could rapidly decline without proper indexation to inflation. The predetermined rise in the personal allowance before the financial crisis starkly contrasts with today’s freeze, further emphasizing the urgent need to address these tax policies.