Britons warned 'biggest hit to tax' could see thousands paying £620 more

Experts at Hargreaves Lansdown have warned the "biggest hit" to tax will likely come from frozen income tax thresholds, with the threshold for paying the basic rate stuck at £12,570 a year.

Sarah Coles, head of personal finance at Hargreaves Lansdown said: "Neither of the main parties have pledged to tackle frozen income tax thresholds, so regardless of who is elected, anyone who gets a pay rise is likely to face a bigger income tax bill.

"The biggest hit to tax would come from the frozen tax thresholds.

"Someone earning £30,000 and getting pay rises of four per cent a year will pay £620 more in tax between this tax year and the end of the freeze in 2028 than if the thresholds had risen."

The Conservatives have made some promises to offset these rises for some people with their pledge to introduce the triple lock plus, cut the National Insurance main rate by 2p, and the axing of the 6p National Insurance rate for self-employed people.

The IFS calculates that adding these changes to frozen thresholds means employees earning between £24,000 and £62,000, and almost all self-employed people would pay less tax.

An employee on £35,000 would pay £260 less tax by 2028/29 and a self-employed person making the same would pay £1,230 less tax, she found.

However, an employee working full-time on the minimum wage would pay £240 more tax thanks to the changes.

Coles said: "Despite the proposed change in the personal allowance for pensioners, once you factor in the impact of frozen thresholds so far, those paying basic rate tax would still be paying £490 a year more tax overall.

"If a flat rate of 33 per cent was introduced, a higher rate taxpayer earning £95,000 and putting £40,000 into their pension would lose £2,800 of tax relief a year.

"It’s vital not to base your plans on guesswork, but if you are intending to put money into your pension this year, and you have it available now, it may make sense to do so sooner rather than later so you know exactly where you stand."

Reversing course on threshold freezes could save high earners £2,500 a year.

For someone on an annual salary of £70,000, pushing the 40 per cent rate up from £50,270 to £60,000 would save just under £2,000 in income tax. And raising the personal allowance from £12,570 to £15,000 would save a further £500.

For a person on the estimated 2024 median full-time wage of £37,000, for example, raising the personal allowance to £20,000 would yield just under £1,500 in savings.

Designed to be updated every year in line with inflation, in 2021 then chancellor Rishi Sunak announced they would instead remain fixed for four years. In the wake of Kwasi Kwarteng’s fiscally calamitous 2022 “mini-Budget”, his successor Jeremy Hunt extended the freeze to 2027/28.

The stealth tax this imposes creates "fiscal drag": growing wages over fixed thresholds means that ever more people are dragged into paying higher rates. Even those who find themselves better off when it comes to income taxes could find it very quickly unwound by other tax rises.

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Council tax hikes haven’t been ruled out by either party, for example, and a seven per cent annual rise would add another £675 a year to the average Band D bill.

Additionally, despite plans for the triple lock plus to alleviate financial tax pressures for pensioners, new research found that around 2.5 million pensioners, or more than one in five of all pensioners, will still have state pensions in excess of the income tax threshold.

The triple lock plus policy would guarantee that the annual total of the state pension and the tax-free allowance for pensioners always rise with the highest of inflation, earnings or 2.5 per cent. This would mean that state pension payments do not become subject to income tax.