{"id":6025,"date":"2024-10-22T14:24:29","date_gmt":"2024-10-22T13:24:29","guid":{"rendered":"https:\/\/www.bainesjewitt.co.uk\/blog\/?p=6025"},"modified":"2024-10-22T13:24:31","modified_gmt":"2024-10-22T13:24:31","slug":"the-impact-of-extending-the-income-tax-threshold-freeze","status":"publish","type":"post","link":"https:\/\/www.bainesjewitt.co.uk\/blog\/the-impact-of-extending-the-income-tax-threshold-freeze\/","title":{"rendered":"The impact of extending the Income Tax threshold freeze"},"content":{"rendered":"<p><span data-contrast=\"auto\">A recent report from the Financial Times has indicated that Chancellor Rachel Reeves may extend the freeze on Income Tax thresholds.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><!--more--><\/p>\n<p><span data-contrast=\"auto\">This will likely be announced in the Budget on 30 October.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">While Labour has committed to not raising the basic, higher, or additional rates of Income Tax, extending the freeze to 2030, first implemented by the previous Conservative Government, would still have consequences for taxpayers.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Although not technically a tax rate hike, this decision has been criticised for creating a &#8216;stealth tax&#8217; on individuals and businesses alike.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">What are the current Income Tax thresholds?<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">As it stands, the current thresholds for Income Tax in the UK are:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"5\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\uf0b7&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Personal allowance \u2013 <\/span><\/b><span data-contrast=\"auto\">\u00a312,570 (the amount you can earn before paying any Income Tax)<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"5\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\uf0b7&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Basic rate (20 per cent) \u2013 <\/span><\/b><span data-contrast=\"auto\">Income between \u00a312,571 and \u00a350,270<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"5\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\uf0b7&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Higher rate (40 per cent) \u2013 <\/span><\/b><span data-contrast=\"auto\">Income between \u00a350,271 and \u00a3125,140<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"5\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\uf0b7&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Additional rate (45 per cent) \u2013 <\/span><\/b><span data-contrast=\"auto\">Income above \u00a3125,140<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">These thresholds are currently frozen until 2028, but Chancellor Reeves is expected to announce an extension to this freeze for another two years, taking it to 2030.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">The &#8216;stealth tax&#8217; and fiscal drag<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">By not adjusting these thresholds for inflation or wage growth, more people will be dragged into higher tax bands as their incomes increase over time.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">This is known as fiscal drag, and it can profoundly affect individuals and businesses.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">The Institute for Fiscal Studies (IFS) estimates that an additional 400,000 people will be pulled into paying Income Tax, with 600,000 more entering higher tax bands if the freeze is prolonged.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">The impact on individuals<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">For individuals, fiscal drag will likely lead to:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\uf0b7&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">More people moving into the higher and additional rate tax bands\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\uf0b7&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Inflation reducing the value of the personal allowance<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\uf0b7\" data-font=\"Symbol\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769226&quot;:&quot;Symbol&quot;,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\uf0b7&quot;,&quot;469777815&quot;:&quot;hybridMultilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Reduced disposable income, which can affect spending and savings habits<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><b><span data-contrast=\"auto\">The impact on businesses<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">While fiscal drag primarily affects individual taxpayers, businesses will also feel the impact indirectly\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">To help employees keep up with rising living costs, businesses may need to increase wages.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">However, as those wage increases push employees into higher tax bands, the value of the pay rise diminishes, leading to dissatisfaction and further pressure on employers to raise wages again.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Should National Insurance thresholds also remain frozen, businesses could face higher employer National Insurance contributions as employee wages increase.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">There has already been talk of employer National Insurance contributions increasing, so this could have a larger impact on businesses.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">With individuals experiencing reduced disposable income due to higher taxes, businesses may see reduced consumer spending, which could affect sales and profitability.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">What can be done to mitigate fiscal drag?<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">There are steps that both individuals and businesses can take to mitigate the impact of fiscal drag.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Tax-efficient savings and investments<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Individuals can make use of tax-efficient savings vehicles, such as ISAs and pensions, to reduce their taxable income.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Maximising pension contributions, for example, not only provides long-term savings benefits but also reduces the amount of Income Tax paid in the current year.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Salary sacrifice schemes<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Employees can consider salary sacrifice schemes for pensions, childcare, or other benefits, which can reduce their taxable income and help mitigate the effects of fiscal drag.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Tax planning for businesses<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Businesses can look at strategic tax planning, including how to manage wage increases and employer contributions effectively.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Our team of accountants can help you with advice on these matters to help alleviate some of the financial pressure fiscal drag places on businesses.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Government sources have suggested that extending the freeze on Income Tax thresholds would not breach Labour&#8217;s election promises, as their manifesto specifically pledged not to increase the Income Tax rates, rather than the thresholds.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">However, this freeze could generate an additional \u00a37 billion per year for the Treasury by 2030, helping to plug the estimated \u00a340 billion fiscal shortfall.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">If you are worried about how fiscal drag could affect your personal or business finances, please contact us today for expert advice.\u00a0<\/span><\/b><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A recent report from the Financial Times has indicated that Chancellor Rachel Reeves may extend the freeze on Income Tax thresholds.\u00a0\u00a0<\/p>\n","protected":false},"author":2,"featured_media":6028,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24,125],"tags":[],"_links":{"self":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/6025"}],"collection":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/comments?post=6025"}],"version-history":[{"count":1,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/6025\/revisions"}],"predecessor-version":[{"id":6026,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/posts\/6025\/revisions\/6026"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/media\/6028"}],"wp:attachment":[{"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/media?parent=6025"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/categories?post=6025"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bainesjewitt.co.uk\/blog\/wp-json\/wp\/v2\/tags?post=6025"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}