Most major thresholds in the income tax and National Insurance
contributions (NICs) system have been frozen since April 2023 or
earlier and, under current plans, are set to stay frozen until
April 2028, meaning inflation erodes their real value. Extending
the freezes by another two years (to April 2030) would raise £8.3
billion in that year (nominal terms). This would come on top of
the £42 billion tax rise that freezes to income tax and employee
and self-employed NICs thresholds already represent.
Freezing thresholds has significant implications for the overall
shape of the tax system, including who pays tax and at what
rates:
- More minimum wage workers are being pulled into tax due to a
combination of the tax threshold freezes and substantial minimum
wage rises. Under an extension to 2029–30, a minimum wage worker
would need to work just 18 hours per week to be liable for income
tax – the lowest level since the minimum wage was introduced in
1999. One consequence of this is to reduce how much of a minimum
wage rise goes to workers, with more of the pay rise being
recouped by the exchequer in the form of tax.
- For the first time since its introduction, the full new state
pension is set to exceed the income tax personal allowance in
2027–28. In 2022–23, just under half of those on the full new
state pension paid tax on their incomes. By 2027–28, that share
will be 100%.
- Extending the freezes to 2029–30 would see the number of
income tax payers in families entitled to universal credit rise
to 3.1 million, 110,000 more than under current policy and
690,000 more than if there had been no freezes. Those impacted
face particularly high effective marginal tax rates – and hence
weak work incentives – typically keeping at most 32p in every
additional pound they earn due to the combined effect of taxes
and the tapering away of benefits.
- Extending the freezes for two years would leave the total
number of income tax payers at 42.1 million in 2029–30 – 960,000
higher than under the current plan and 5.1 million higher than if
there had been no freezes at all. It would leave the number of
people paying higher-rate tax (40% or above) at 10.1 million –
790,000 more than under the current plan and 4.8 million more
than if there had been no freezes at all.
Matthew Oulton, a research economist at IFS and an author
of the comment, said:
‘The freezes to personal tax thresholds have already represented
a huge tax rise. Extending them would raise significant revenue
in a broad-based and progressive way. It would increase tax on
all employees working full-time, most working part-time, most
minimum wage workers and many low-income pensioners. The
Chancellor may well want to raise more revenue and change who
pays tax, and changing thresholds is a reasonable tool to use.
But freezes set many years in advance are not – how big the tax
rise turns out to be depends upon the unknown and unpredictable
path of inflation.'
ENDS
Notes to Editors
How are frozen tax thresholds reshaping who pays personal
taxes? in an IFS report by Isaac Delestre, Matthew Oulton
and Tom Waters.
