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Basic rate taxpayers effectively paying 23.5% to the government

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The freeze in income tax thresholds mean middle earners are set to pay the equivalent of 23.5% - higher than the current 20% headline rate.

Some workers’ tax bills will rise by the equivalent of a 3.5 percentage point hike in the headline rate of tax, analysis by an investment platform revealed.

Last week, the Chancellor Jeremy Hunt confirmed a freeze on income tax thresholds for another two years until 2028.

Following the announcement, experts suggested the move would result in millions of workers being pulled into higher rate tax bands, while others would be thousands of pounds worse off as a result.

This “tax hike by stealth” means someone on a salary of £50,000 will pay just under £59,000 in income tax over the six years of the “deep freeze”, AJ Bell said.

The total tax bill is more than £9,000 higher than it would be had tax thresholds been uprated by inflation during that time.

AJ Bell noted that had the government instead increased the headline level rate of taxation, rather than implement the freeze, the basic rate of tax would need to have risen to 23.5% from this year to generate the same tax bill for a worker earning £50,000.

It said middle earners are particularly vulnerable to the fiscal drag, as it has the effect of pulling them into a higher tax band.

However, lower earners are also impacted by the freeze in the personal allowance. Someone on the average UK salary of £33,000 will be subject to the equivalent of an increase in the basic rate of income tax to 22%.

But a higher earner (£75,000) would be hit by both the basic and higher rate of tax increasing three percentage points each (23% and 43% respectively).

It revealed that would see them pay the same £126,000 income tax bill they face over the six years of frozen tax thresholds.

AJ Bell added that the figures illustrate the full extent of rising income tax bills for ordinary workers, “despite the government’s sleight of hand designed to avoid raising headline level rates of income tax”.

Government tax take

Laura Suter, head of personal finance at AJ Bell, said: “These figures lay bare just how much the decision to freeze tax allowances will cost taxpayers over the six years of the freeze. They also highlight the sneaky tactics employed by the Government to nab more money from our pay packets without many taxpayers realising.

“Imagine the uproar and headlines if the Government had increased the basic rate of tax from 20% up to 23.5%. Not least because it would break a manifesto commitment. But, more importantly for voters, it would be much easier for them to understand the scale of the huge hike in their tax bill in the next few years.”

Suter added that most taxpayers don’t understand how ‘fiscal drag’ works or the real impact of the frozen allowances, “and the Government is definitely banking on that fact”.

She said: “What’s more, unless the Government hikes tax thresholds by huge amounts in 2028 (or overhauls the income tax system), it’s a fiscal drag that we’ll take forward for the rest of our working lives – those lost six years can never be reclaimed.

“Each taxpayer is impacted differently depending on their pay, so the equivalent tax rate increase varies across income levels. But once again the ‘squeezed middle’ are hit hardest, with the impact of the frozen allowances meaning those with salaries near the current higher-rate threshold are squeezed on both sides, getting less of their income tax free and seeing more of their income pushed into the higher-rate band. The result is the same as if thresholds were instead uprated to keep them out of the higher rate tax band, but the basic rate were increased to a whopping 23.5%.”

The table below (source: AJ Bell) shows the effect of fiscal drag:

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