‘Stealth’ raid on income tax thresholds

Rishi Sunak launched a “stealth” income tax raid in the Budget on Wednesday by freezing the thresholds at which the tax is paid from 2022, in a move that will raise £8bn in the 2025-26 tax year alone.

The chancellor said action was necessary to begin fixing the public finances, which have been ravaged by the coronavirus pandemic.

Sunak kept the promise in the Conservative party 2019 manifesto not to raise income tax, national insurance or VAT.

But he announced he would freeze the thresholds at which the basic and higher rates of income tax are paid from April 2022 to April 2026, in a move that is likely to hit more than 2m people.

The changes will bring 1.3m individuals into the income tax net by 2025-6 and lift 1m taxpayers into the higher tax bracket, according to the government’s Office for Budget Responsibility.

The personal allowance at which people start paying income tax will rise from its current £12,500 to £12,570 from April 6 but will then be maintained at that level until April 2026, rather than rising with inflation.

The higher-rate tax threshold will increase from the current £50,001 to £50,270 on April 6 and be held there until April 2026.

Similarly, the chancellor said the tax threshold for inheritance tax and the annual exemption for capital gains tax would remain until 2026. The threshold above which inheritance tax is due is currently £325,000 — unchanged since 2009. The CGT exemption is £12,300.

Financial and tax experts said the decision to freeze the thresholds amounted to a “stealth” tax.

Holly Mackay, chief executive of Boring Money, said: “These measures amount to stealth tax rises on income and investments across the board. Until the middle of the decade, steady tax rises are hard-coded into the system, punishing retirement investors, those with assets invested outside a tax wrapper, and those who pass on investments and assets in their estate.”

Matthew Phillips, director of wealth planning at Canaccord Genuity Wealth Management, described the move as “clever” from an economical and political perspective. However, he said many more people would fall into higher-rate bands in future, as their salaries rise.

“In real terms, it is actually a tax increase. It just doesn’t look like that,” Phillips said. “If there is a bit of inflation and growth by keeping everything the same for six years [the government] can tax all of that inflationary growth and the extra bits of growth.”

The decision to freeze income tax thresholds represented the second highest revenue raising measure in the Budget after the increases to corporation tax, added Tom Evennett, partner in private client services at EY.

He estimated the total tax cost for a middle earner over four years could be in excess of £500, rising to more than £2,500 for those on higher incomes.

“Many individuals employed in jobs not traditionally considered to be highly paid will fall into the band of higher income tax as the freeze on the higher rate threshold turns some blue collars white,” Evennett added.

Meanwhile, investors, buy-to-let property investors and business owners expressed relief that the Budget contained no substantial changes to capital gains tax.

However, tax experts speculated there could be further announcements about the longer-term direction of CGT on March 23, when the government will announce multiple tax consultations.

“Changes to CGT were widely anticipated but ultimately didn’t materialise today, with the chancellor rightly focusing on the pressing matter of kick starting the economy,” said Rebecca Williams, head of wealth planning at Brown Shipley.

“However, we shouldn’t be lulled into a false sense of security. This doesn’t preclude the chancellor raising rates of CGT and the spectre of alignment with income tax rates is still hovering in the background,” she said.