The Income Tax Freeze

Over the last couple of years, there’s been quite a bit of turbulence in regards to income tax. Usually, these personal tax thresholds are increased in line with inflation rates, but back in March 2021, Rishi Sunak (the chancellor at the time) announced that some thresholds would be frozen at the 2021–2022 rates for the next four years. Then in November 2022, Chancellor Jeremy Hunt announced that this would be extended for a further two years until 2027–2028, along with changes to other personal tax rates.

With so much change in such a short space of time, we’re discussing what the current threshold freezes and/or changes are and what the implications of these are, taking into account the current cost-of-living crisis.

What are the current personal tax threshold rates?

Personal allowance threshold

The personal allowance threshold (the amount at which income tax becomes due) is currently frozen at £12,570 until 2027–2028.

Higher rate threshold

Similarly, the higher rate threshold of £50,270 is also frozen until 2027–2028. If a tax payer earns more than this over the course of the tax year, they’ll be charged tax at 40% for any earnings over that amount (up to the additional rate threshold of £125,140).

Additional rate threshold

In April this year, the lowered additional rate threshold came into effect. Previously set at £150,000, it is now £125,140. Earnings over this amount will be subject to tax at a rate of 45%.

National Insurance Contributions thresholds

National Insurance Contributions (NICs) for both employees and their employers have also seen a lot of change over the last couple of years, with the government confirming at last year’s Autumn Budget that the thresholds would remain frozen until 2027–2028. You can find the current rates of each class of National Insurance via the government’s guidance page.

What’s the impact of the freeze?

Given the current cost-of-living crisis and the fact that the UK economy is still recovering from the pandemic, it’s no wonder that these income tax threshold freezes are having huge knock-on consequences for all UK tax payers.

High inflation rates increased wages quite significantly this year, but these tax freezes mean more people are becoming liable for tax – and in many cases are being pushed into the higher tax brackets. The combination of increased wages and frozen tax thresholds means that many people will actually be worse off. Data from the Office for Budget Responsibility identified that this is likely to mean that, by the end of the forecast, 9% more people will be liable for tax, 47% more tax payers will be pushed into the higher rate threshold and 47% more tax payers will be liable for additional rate tax.

In addition, the IFS compared tax figures from 1991–1992 to now and identified that more people than ever are paying the higher tax rate, with one in eight nurses and one in four teachers now set to fall into the higher rate tax category by 2027–2028. In addition, it identified that by the end of the freeze, 3.1% of adults could pay a marginal tax rate of either 60% or 45%.

How can you reduce your tax liability?

If you’re feeling concerned over the government’s decision to freeze personal tax thresholds (and let’s be honest – who isn’t?!) and how this is going to impact your income, remember that there are ways you can legitimately reduce your tax exposure. Speaking to an experienced accountant is the best and safest way that you can do this. As a team of friendly and professional chartered accountants, we’ll get to know you and your individual requirements so that we can effectively identify key opportunities to help your money work smarter for you. Please get in touch with our team or request a free consultation below to find out more, or visit our Tax Planning webpage.