Latest news with #taxThresholds
The Guardian
10 hours ago
- Business
- The Guardian
Reeves expected to freeze income tax thresholds to raise fresh funds
Rachel Reeves is expected to extend a freeze on income tax thresholds to raise fresh funds after the government's U-turn on welfare cuts left her with a growing budget hole. The chancellor was already facing pressure to backtrack on pledges not to increase taxes further as she attempted to fix public services and grow the economy while meeting her fiscal rules. However, Keir Starmer's U-turn late on Thursday has increased the likelihood that she will raise taxes or cut spending in the autumn budget. Independent commentators are all but unanimous in expecting taxes to go up – and many point to the threshold freeze, which is estimated to raise £8bn a year, as the most likely option. The freeze, introduced by the former Conservative chancellor Jeremy Hunt, drags ever more people into paying the higher rate of tax and is due to end in 2028. The number of people in the UK paying income tax at the higher rate is already expected to increase by 500,000 this tax year, to 7 million. 'The most obvious thing would be to extend the income tax thresholds, for another two years,' said Ruth Curtice, director of the Resolution Foundation thinktank – which estimates that the U-turn on disability benefits will cost the chancellor £3bn a year by 2029-30. That bill comes in addition to the £1.25bn price of Reeves' recent decision to reverse most of the cut to pensioners' winter fuel allowance – and the widely held expectation that the Office for Budget Responsibility will downgrade its growth forecasts in the autumn. The Treasury's independent watchdog is revisiting its estimate of productivity – a key determinant of economic growth – which looks optimistic relative to most independent forecasts. Paul Johnson, the outgoing director of the Institute for Fiscal Studies, said the U-turns on benefits could be dwarfed by the probable downgrade from the OBR. 'In one way this [the welfare U-turn] doesn't change anything very much – it's a £3bn-£4bn change at the end of the period, and the OBR forecast could change things by a lot more than that – but obviously if the OBR moves in the wrong direction then this adds to the pressure,' he said. Johnson pointed out that the most straightforward ways of raising large enough sums had been ruled out by Labour's pre-election tax pledges. 'There are always ways of finding small numbers of billions, but if you are looking for £10bn or £20bn it gets really quite difficult, if you're not going to increase income tax or VAT,' he said, adding, 'the threshold freeze is obviously the politically easiest thing to do.' Simon Wells, chief European economist at HSBC, agreed. 'They're boxed in and something has to give,' he said. 'The income tax thresholds is by far and away the line of least resistance.' Mujtaba Rahman, managing director at the consultancy Eurasia Group, said: 'Reeves may have to find up to £20bn to balance the books and give her enough headroom for future emergencies from a series of small-scale changes. They are likely to include extending the freeze on income tax thresholds and allowances for another two years.' The chancellor's team continue to insist that there is no inevitability about tax increases, pinning their hopes on a rosier economic outlook by the time of the autumn budget. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion They claim that firms have become more upbeat about the UK as an investment prospect, and many consumers are benefiting from above-inflation pay rises. 'Sentiment is really changing,' argued a Treasury source. Asked earlier this week about recent worse-than-expected public finances figures, Reeves said: 'I wouldn't read too much into one month's data. It's just one of a number of factors that will affect the next forecast that the Office for Budget Responsibility will produce.' However, there is also frustration in government at the way the OBR's forecasting process, combined with the slim £10bn of headroom Reeves has against her fiscal rules, has led to constant market speculation about the chancellor's next move. One proposal made recently by the International Monetary Fund (IMF) was for just one OBR forecast a year. The Treasury is understood to be sceptical about this idea, as it would make the UK an international outlier – but officials are understood to be looking at the nature of the spring forecast. Downgrading its role could prevent the scramble for savings seen in the run up to this year's spring statement which led to the welfare cuts. The Bank of England governor, Andrew Bailey, this week warned against 'over-interpreting' the Office for Budget Responsibility's forecasts.
Telegraph
a day ago
- Business
- Telegraph
Seven million workers dragged into higher income tax bands
Seven million people have been dragged into paying higher rates of income tax as a result of a stealth raid on wages, figures show. Frozen thresholds have forced an extra 520,000 taxpayers into the 40p bracket in the last year, according to estimates by HM Revenue & Customs (HMRC). It brings the total to just over seven million in 2025-26, a 60pc rise from the 4.4 million in 2021-22 when income tax thresholds were first frozen under the Tories. The sharp rise in higher-rate taxpayers comes despite Labour's manifesto pledge not to raise taxes on working people. The number of 45p additional-rate taxpayers has more than doubled from 520,000 to 1.2 million over the same period. The figures also reveal that an extra two million pensioners have been pulled into the tax net in the last four years. Some 8.7 million people aged 66 and over are now paying tax on their income, up by a third in 2021-22. Income tax thresholds, including the £12,570 tax-free 'personal allowance' have been frozen since 2022. Keeping thresholds frozen means earners lose a larger share of their incomes to tax, as inflation pushes up wages in a process known as fiscal drag. Chancellor Rachel Reeves has committed to maintain the freeze until 2028 – the deadline under the Tories. However, there are fears that the Chancellor may choose to extend the freeze beyond this date in a bid to plug gaps in the country's finances. Expectations are mounting that the Chancellor will be forced to raise taxes in the October Budget despite stating that the slew of tax rises last October was a 'once in a generation' event. Labour's winter fuel payment about-turn, a rumoured end of the two-child benefit cap, higher government borrowing costs and a possible productivity downgrade have all piled pressure on Ms Reeves to raise revenue. Jon Greer, head of retirement policy at Quilter, said: 'The sharp rise in the number of people who are state pension age and now paying income tax is a direct consequence of the decision to freeze the personal allowance since 2021 and a textbook example of fiscal drag in action. 'Many of these individuals are not high earners but are simply victims of a frozen threshold in a period of rising prices. For some, it's their first experience of paying income tax in retirement, and it's leading to confusion, frustration, and unexpected bills.' Laura Suter, director of personal finance at AJ Bell said both pensioners and working people were feeling the impact of the stealth tax raid. She added: 'Rising incomes and frozen thresholds mean the taxman is set to rake in an extra £20bn this year, with the total income tax haul set to rise to £323bn. 'In contrast, in the first year of the income tax threshold freeze, the Government collected £245bn in tax. The staggering £78bn climb in the nation's annual income tax bill illustrates the huge impact the tax freeze has had on our finances.' A Treasury spokesperson said 'This Government inherited the previous government's policy of frozen tax thresholds. 'At the Budget and the Spring Statement, the Chancellor announced that we would not extend that freeze. 'We are also protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of income tax, employee national insurance or VAT. 'That's the plan for change – protecting people's incomes and putting money into people's pockets.'
Times
21-05-2025
- Business
- Times
More than a million pensioners pay higher rates of tax
More than a million pensioners are paying the higher rates of income tax, double the number from four years ago, figures have shown. About 904,000 people at state pension age, which is presently 66, pay the 40p rate, while 124,000 lie in the 45p band, according to data obtained under a freedom of information request by LCP, a pensions consultancy. In 2021-22, the numbers were 455,000 and 39,000 respectively. The data is one of the clearest examples yet of the impact of the freeze on income tax thresholds introduced by Rishi Sunak when he was chancellor in 2021 and extended by the Labour government until April 2028. It has dragged more people into paying higher rates of tax as their incomes rise and is often
