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Income Tax Threshold Freeze Extended to 2028

Published by Prerana
Posted Date: June 3, 2024 , Modified Date: June 3, 2024

The Chancellor of the Exchequer, Jeremy Hunt, has confirmed that the income tax threshold freeze will continue to be applicable for the next four years. This will lead to more people paying higher tax rates as their income increases.

What is the Income Tax Threshold Freeze?

Income Tax threshold is the income level from where you start paying annual Income Tax. In the UK, the personal allowance threshold of £12,750 is the Income Tax threshold. Income Tax is not levied on earnings below this amount.

This Income Tax threshold of £12,570 is set to remain constant for the next four years, i.e., until 2028. The tax rates applied on income over this income are as follows:

Band

Annual Income

Tax Rate for 2024/25

Personal Allowance

Up to £12,570

0%

Basic Rate

£12,571 to £50,270

20%

Higher Rate

£50,271 to £125,140

40%

Additional Rate

Over £125,140

45%

This tax threshold freeze is projected to raise £40 billion a year by the Tax Year 2027/28, making this Britain’s biggest tax rise on income in at least 50 years.

What is the Impact of the Freeze?

The income tax threshold freeze will have three major implications, as stated below:

  • More people will end up paying higher tax rates
  • The government will collect more tax revenue without officially raising the tax rates
  • Even if your annual income increases, you will end up paying more taxes, leaving less money in your pocket

Both the Conservative and the Labour Party have pledged that the tax rates will not rise ahead of the election. Hunt explained the main reason for the tax rise is due to the global pandemic and Russia’s invasion of Ukraine. However, Darren Jones, the Shadow Chief of the Treasury, believes that the UK’s economic conditions started tanking before the Ukrainian war.

income tax

The director of the Institute of Fiscal Studies (IFS) explains that the government can still increase the tax revenue with the threshold freeze. The Chancellor or the future chancellor will have to raise government revenue, either by spending cuts or some other way.

Conclusion

The Income Tax threshold or the personal allowance threshold will freeze until the Tax Year 2027/28. This freeze will result in people paying higher taxes without raising the tax rates. As their annual income increases, more people will fall into the higher-rate taxpayer bracket.

However, this is not a concrete solution for the government to increase their revenue. So, the future chancellor must find a way to increase the government revenue without raising tax rates.

Prerana
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