Income tax brackets frozen until 2028

The Chancellor has extended the freeze on UK income tax allowances and thresholds until 2027/28.

This will pull more people into the income tax system for the first time, or into higher tax brackets over time, as wages rise under record inflationary pressures.

The Institute for Fiscal Studies has previously said the move could yield £30bn a year by 2026 due to the impact of high inflation.

Previous analysis by AJ Bell found the measure could cost the average earner nearly £2,600, with the biggest cut for middle earners, with those on a salary of £50,000 having to pay an additional £6,570 in income tax over the period compared to a system where income tax thresholds matched inflation.

AJ Bell has found that an average earner with a salary of £33,000 in 2021/22 before the start of the income tax threshold freeze will end up paying £27,378 in income tax if the policy is extended until 2027/28.

They would only pay £24,821 if the income tax thresholds were linked to inflation over the same period, a difference of 10%.

Hunt is eyeing tax hikes and government spending cuts as he seeks to plug a gaping hole in public finances.

Hunt also announced that the point at which top earners start paying the top rate of tax is being lowered from £150,000 to £125,140.

Inheritance tax

Another threshold that has been frozen is inheritance taxwhich is currently a 40% tax on any estate over £325,000 (known as the zero rate bracket).

Those with children or grandchildren who pass on the family home are granted an additional ‘zero-rate residency bracket’, which takes the allowance from £325,000 to £500,000.

When he was Chancellor, Sunak froze the threshold at £325,000 until April 2026. It has now been extended until 2028.

Experts say this means more people will have to pay the IHT as more properties exceed the tax threshold due to rising house prices.

Linda Wallace, Director of Wesleyan Financial Services at Wesleyan Group, said: “Inheritance rights have again been looted from the Treasury coffers. The inheritance tax payment threshold has been frozen since 2009. Not only has this meant that it has not kept up with inflation, but due to rising house prices, more and more people are falling its scope.

“While £325,000 may seem like a lot, those who own property are likely to find they are close to or over that limit, and may not be able to leave loved ones as much as they would have hoped when the time comes. There are ways to donate money tax-free, and making the most of these allowances is the only way to reduce the potential tax burden.

Comments are closed.