Chancellor Rachel Reeves has chosen not to extend the freeze on income tax thresholds.
This policy, aimed at addressing a £40 billion shortfall in public finances, will push many workers into higher tax brackets so the Chancellor has decided against it
The Conservative Government froze income tax thresholds and national insurance
The policy, known as fiscal drag, effectively increases tax burdens without raising headline rates, as static thresholds fail to keep pace with inflation and wage growth.
Analysis by Coventry Building Society shows that by the end of the decade, an estimated 2.7 million more earners could see their savings allowance slashed to just £500.
Budget2024: This policy aims to address a £40bn shortfall in public finances
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This reduction, coupled with higher interest rates, was expected to lead to a substantial increase in tax bills on savings.
Jeremy Cox of Coventry Building Society warned of a “double whammy of fiscal drag and higher interest rates” that has led to a surge in people paying tax on savings income.
The impact extends beyond just income tax. As pay rises tip workers into higher tax bands, they end up paying more tax overall.
The analysis by Coventry Building Society, based on Office for Budget Responsibility figures, suggests savers could face a total tax bill of over £12bn in by 2029 as regular earnings growth, is expected to push seven million workers into higher tax bands.
With higher interest rates, savers are earning more on their deposits than in recent years. However, those with non-Isa savings are using up their personal savings allowances more quickly.
Government sources have pointed to the “language” of the June manifesto, in which the party pledged not to increase “the basic, higher, or additional rates of income tax”.
This suggests the chancellor believes a move to extend the thresholds would not constitute a breach of Labour’s election commitments as the 20p, 40p and 45p rates would remain unchanged.
The thinktank the Institute for Fiscal Studies said extending the freeze would pull 400,000 more people into paying income tax while another 600,000 people would be dragged into the higher and additional rates. The measure could bring in £7bn a year.
Budget 2024: Rachel Reeves aims to fill the black hole in the public finances
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The current chancellor aims to plug a £40bn hole through tax rises and spending cuts.