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Rishi Sunak’s government have this week announced an increase in income tax to take effect next year. This “stealth tax” is seen as a huge knock to an already struggling United Kingdom.
New stats from Resolution Foundation estimate the government will net £40 billion a year by 2027-28 – dramatically more than the original £8 billion a year it was meant to rake in at its peak. Higher inflation typically equals higher wages, which will push more people into the next tax bracket. Had income tax bands been linked to inflation, rather than frozen, we’d have seen a sizeable leap in the amount people could earn each year before hitting the next tax bracket. On top of the frozen allowances, the government reduced the threshold for additional rate tax, dragging more people into the top rate of tax.
MoneyMagpie founder Jasmine Birtles has said, “This is what people like me have been warning about for the last couple of years. These ’stealth taxes’ creep up on workers and eat into their income. The already struggling working people are about to suffer an even further drop and we only have the government to blame”.
Head of personal finance at AJ Bell Laura Suter has said: “These latest figures highlight the staggering impact that higher inflation will have on the amount of tax the nation is paying. The government’s decision to freeze the income tax thresholds at a time when inflation has gone off like a runaway train has boosted government coffers – but at a large cost for most UK households.
“While Jeremy Hunt will be rejoicing at the boost to his budget, it’s costing households at a time when their budgets are already stretched. AJ Bell calculations show that someone earning £50,000 a year will pay an extra £9,000 in tax across the six years of the threshold freeze, when compared to if the tax thresholds had increased with inflation. Had the government instead increased the headline level rate of taxation, rather than implementing a tax hike by stealth, the basic rate of tax would need to have risen to an astonishing 23.5% from last tax year to generate the same total tax bill for a £50,000 earner. The tax hike for middle-earners is particularly acute because they are vulnerable to the fiscal drag effect pulling them into a higher tax band.