The real cost of frozen income tax bands

The Chancellor’s Spring Statement laid bare the tax raid that’s hitting workers, with the Office for Budget Responsibility (OBR) forecasting the biggest tax take relative to the economy since World War Two.

The government’s own figures show the amount the nation is set to pay in income tax, outside of self-assessment taxpayers, is going to rise by almost 11% this tax year compared to last tax year. It means the nation’s income tax bill will hit £260.3 billion for 2024/25.

Future costs

That’s nothing compared to the £310 billion taxpayers will shell out in income tax in 2027/28. The OBR stated that by 2027/28, tax as a share of GDP will have reached a historic high of 37.7%, with frozen income tax thresholds and rising wages a major factor behind the increase.

There’s some relief for all our tax bills toward the end of the decade. The overall bill is forecast by the government to keep rising and hit £322 billion, although it drops as a share of GDP by 2029/30 after the freeze on income tax bands ends, meaning we can all earn slightly more before falling into the next tax band.

Tax bands without the freeze

Nothing can make up for the lost years where income tax bands have seen no inflationary uplift. Based on the latest OBR forecasts for inflation, by the end of the tax band freeze the personal allowance would have increased to £16,385 had it been increased with inflation. Instead, it will remain stuck at £12,570 – almost £4,000 less.

At the same time the higher-rate threshold would have risen to just over £65,500 by the 2027/28 tax year, more than £15,000 higher than the frozen band.

Current forecasts and policy

The OBR has also boosted the forecasts for wage growth – which is good news for those in employment if it comes to pass, as they may see chunkier pay rises. But it’s also a boost to the Treasury, as they nab a healthy chunk of that pay rise in tax.

In fact, the OBR now forecasts that the Treasury will net an extra £49bn in non-self-assessment income tax and National Insurance receipts before the end of the Parliament, compared to its estimates in October.

Labour promised not to increase rates of income tax in its general election manifesto and, if you stick to the letter of the law, they haven’t. But people are paying more in taxes, thanks to them continuing the Conservatives’ deep freeze on income tax bands.

The per-threshold breakdown

The freeze means higher tax bills for anyone who earns more than the personal allowance. A basic-rate taxpayer will pay almost £3,000 more in tax over the period of the freeze, assuming average wage increases during that time. Had thresholds increased with inflation, more of their money would have been protected by the tax-free allowance. But with frozen tax bands they are dragged into paying 20% tax on more of that money.

Someone with an income of £50,000 is hit even harder, because previously their wage increases would have remained under the higher-rate band. But the frozen allowances mean that pay growth results in them being taxed at 40% on a decent wodge of their income. It means they will pay almost £15,000 more in tax over the entire duration of the freeze.