A MILLION extra people will be dragged into paying income tax if Rachel Reeves presses ahead with a punishing stealth rise, a new report reveals.
Pensioners and minimum wage earners face being hit by tax thresholds being frozen for a further two years to help balance the books.
Income tax thresholds are frozen until 2028, so when your pay rises, more of it can be taxed at higher rates even though the bands do not change – an effect known as “fiscal drag”.
This is often called a “stealth tax” because you end up paying more without the tax rates themselves increasing.
The government is considering extending the freeze by two years to 2030.
If that happens, the Institute for Fiscal Studies (IFS) estimates around 960,000 more people will be pulled into higher tax bands as wages grow but thresholds stay the same.
Extending the freeze until the end of the decade for both income tax and national insurance will help bring in £8.3billion into Treasury coffers, according to the think tank.
The move would also increase the number of income taxpayers in families entitled to Universal Credit to 3.1million, which is 110,000 more than under current policy.
It would also drag more minimum‑wage workers into paying income tax for the first-time.
At the moment, you need to work about 21 hours a week at the minimum wage before tax applies.
But if the freeze continues until 2030, you would start paying after around 18 hours a week — the lowest since the minimum wage was introduced in 1999.
State pensioners are also likely to start paying income tax from 2027.
The government has pledged to keep the “triple lock”, which guarantees the state pension rises by the highest of inflation, wage growth, or 2.5%.
Revised earnings growth of 4.8% points to the new State Pension rising to roughly £241.30 a week, or £12,534.60 a year, just £35.40 below the frozen personal allowance.
This means that if tax thresholds do not go up, the State Pension is likely to exceed the allowance by April 2027.
As a result, millions of people relying solely on the State Pension could start paying income tax for the first time.
Shadow Chancellor Mel Stride said the study “lays bare” the impact if the government break their promises despite pledging not to extend the threshold freeze.
He said: “This move would drag hundreds of thousands more people into paying tax or into higher bands, taking money from the pockets of hardworking people to pay for more and more welfare spending.
“Enough is enough. Labour need to show some backbone and control spending, not keep raiding family pay packets to cover for their own economic failure.”
Reeves is looking at filling a financial black hole of around £30billion and also increase her financial buffer to withstand economic shocks.
Matthew Oulton, from the Institute for Fiscal Studies, said: “The freezes to personal tax thresholds have already represented a huge tax rise.
“Extending them would raise significant revenue in a broad-based and progressive way.
“It would increase tax on all employees working full-time, most working part-time, most minimum wage workers and many low-income pensioners.
“The Chancellor may well want to raise more revenue and change who pays tax, and changing thresholds is a reasonable tool to use.
“But freezes set many years in advance are not – how big the tax rise turns out to be depends upon the unknown and unpredictable path of inflation.”
The Treasury was contacted for comment.
How does income tax work?
WHEN you check your payslip, seeing a chunk of cash missing for the taxman can be painful.
But how does it actually work?
Everyone has a personal allowance, which is the amount you can earn tax-free each year.
Currently, this figure sits at £12,570 and is frozen until 2028.
If you are blind, you may receive a higher allowance, while married couples can sometimes transfer unused allowance between partners using the marriage allowance.
Once you earn a penny over that £12,570 threshold, income tax kicks in at different rates depending on how much you make.
Here are the bands:
- Basic Rate (20%): On earnings between £12,570 and £50,270.
- Higher Rate (40%): On earnings from £50,271.
- Additional Rate (45%): On earnings over £150,000.
High earners need to be particularly careful because earning over £100,000 means your tax-free allowance reduces by £1 for every £2 you earn.
If your salary hits £125,140, you lose your personal allowance entirely and must pay tax on every single penny you make.
