Mini-Budget: Kwarteng announces cut to basic rate income tax
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Chancellor Jeremy Hunt and Prime Minister Rishi Sunak will tomorrow lay out their economic vision for the UK. However, after the disastrous mini-Budget, it has already been warned tax hikes are likely – with the pair expected to zero in on income tax.
Experts have suggested a freeze on income tax thresholds until 2027/28 may be enacted in tomorrow’s Autumn Statement.
Such a move could see average earners hand an additional £2,600 to the taxman, new analysis from AJ Bell has shown.
Handing more money over would be those on a £50,000 salary, who would pay an extra £6,570 in income tax.
AJ Bell’s analysis showed an average earner on a salary of £33,00 in 2021/22 before the income tax threshold freeze began will end up paying £27,378 in income tax if the policy is extended to 2027/28.
These individuals would pay just £24,821 if income tax thresholds were linked to inflation over the same period – a difference of 10 percent.
It is expected the “biggest squeeze” will be for middle earners who have salaries just below the higher rate income tax threshold.
These people are likely to be dragged into paying income tax at 40 percent, with a substantial hit on their pockets.
A person earning £50,000 will end up paying 14 percent more tax over the period from 2022/23 to 2027/28, according to AJ Bell.
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Laura Suter, head of personal finance at AJ Bell, said: “In a swift about-turn, a nation that was getting tax breaks across the board just weeks ago is now braced for an onslaught of tax rises in this week’s statement.
“The new chancellor has the unenviable task of filling the Government’s financial black hole, tackling the current cost of living pressures and not deepening the UK’s recession, all while keeping markets on side.
“In a bid to avoid spooking markets again, the Chancellor Jeremy Hunt’s approach seems to be to leak everything so that no-one is surprised when he gets up at the dispatch box.
“From extending the freeze on tax allowances to a rumoured reduction in the threshold for the highest rate of income tax, the rabbits are already out of the hat.”
A freeze to income tax thresholds could have several impacts for Britons.
Rather than rising with inflation, the point at which people start to pay tax, and which the higher rate of tax kicks in would be stuck at its current level until 2027/28.
As wages rise, it would mean millions more are propelled into becoming higher-rate taxpayers.
They would see a larger chunk other earnings hit with tax than before.
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This idea is known as fiscal drag, where inflation and earnings growth push people into higher tax brackets.
Ms Suter added: “Fiscal drag isn’t a phrase well understood by many among the electorate, and the new Chancellor will be relying on that.
“Complicated headlines about a stealth tax rise and frozen allowances will be more palatable than a direct hike in income tax rates – and crucially don’t break that 2019 manifesto pledge.
“But it will likely cost the taxpayer more, assuming wage inflation remains at expected levels.”
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