Tax rises “hidden” in fiscal drag could cost Britons thousands of pounds extra a year by 2028 with low-earners to be “hit hardest”, new research by interactive investor has found.
According to calculations, the true price of fiscal drag will cost taxpayers the same as it would if income tax rates increased to 25 percent or 30 percent by 2028, depending on income levels.
Fiscal drag works by freezing tax thresholds so that more income is taxed at a higher rate as wages rise with inflation.
As per Chancellor Jeremy Hunt’s 2022 Autumn Statement, income and National Insurance tax thresholds will remain frozen at current levels until 2028, which means taxpayers will face a larger tax bill in the years to come as thresholds lag behind inflation.
Low earners on £20,000 could see their tax bill hit £3,762 a year by 2028, including income tax and National Insurance, assuming their wages keep pace with inflation.
According to interactive investor, this is comparable to the basic tax rate rising from 20 percent to 30 percent, which in that instance, would reflect a tax bill of £3,796.
Fiscal drag would see middle earners on £30,000 pay £7,654 a year in tax by 2028. This compares to a £7,844 tax bill in 2028 if tax thresholds kept pace with inflation, but basic rate income tax was raised to 25 percent.
According to interactive investor, higher earners on £100,000 could “pay the biggest penalty” for fiscal drag because the tax rules mean they pay 60 percent tax on income earned above £100,000, due to losing the £12,570 tax-free personal allowance.
Calculations show they would pay £4,326 extra by 2028 compared to now, due to losing most of their personal allowance as their wages rise with inflation.
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By 2028, top earners on £150,000 could see £57,000 of their income taxed at 45 percent rather than none in tax year 22/23, as a product of the 45 percent tax rate reduced and frozen at £125,000.
Alice Guy, head of pensions and savings at interactive investor, said: “Hidden tax rises will decimate the finances of many families over the next few years. As if the cost of living crisis wasn’t enough, taxpayers are facing a massive tax grab over the next few years as tax thresholds lag behind inflation.
“Blistering tax rises will hit lowest earners the hardest because more of their income is tax-free. Someone earning £20,000 in March 2023 only paid tax on around £7,500 (36 percent) of their income, whereas they’ll need to pay tax on £11,756 (48 percent) of their income by 2028.”
Ms Guy said the numbers reveal the “shocking truth” that freezing tax thresholds is “equivalent to raising income tax by five percent for most earners, and 10 percent for low-income earners” that can afford it the least.
Ms Guy continued: “Fiscal drag is largely hidden because tax is complicated and not many people check their pay slips. Many families fighting hard to make ends meet as costs rise, but fiscal drag means that the odds are increasingly stacked against them.
“If you can afford to, then paying into your pension can be a great way to reduce your tax bill. Pension contributions are tax-free, meaning that it only costs £80 to pay £100 into your pension if you’re a lower rate taxpayer and £60 to pay in £100 if you’re a higher rate taxpayer.”
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