Frozen Tax Thresholds: Workers’ Pay Gets Erased by Hidden Tax Hikes

Wages across the UK have been rising faster than inflation, but this could soon translate into higher taxes for many workers due to the government’s decision to freeze tax thresholds. The freeze, set to last until 2031, means that as salaries increase, more income will be taxed at higher rates. The effect is being described by some as a “stealth tax,” which quietly increases the tax burden without altering the official tax rates.

The UK government’s policy, which was extended in the Autumn Budget, has far-reaching implications for workers. While wages have been growing faster than the cost of living, according to the Office for National Statistics, the freeze on thresholds means that many earners will see a substantial increase in their tax liabilities in the coming years. This move is expected to generate billions for the government, but it is likely to strain the finances of workers whose earnings push them into higher tax bands.

The Impact of the Tax Freeze on Workers’ Take-Home Pay

According to BBC calculations, someone currently earning £39,000 could face an additional £465 in income tax and National Insurance by 2030-31 due to the threshold freeze. This figure includes an estimated £227 added by the government’s extension of the freeze. Similarly, those earning £50,000 could see their tax bill rise by £1,309, with £704 of this increase due to the latest extension of the policy.

The freeze is especially impactful for workers whose pay rises move them across thresholds into higher tax bands. The UK tax system is designed with a tiered approach, meaning income is taxed at different rates depending on how much you earn. However, the thresholds at which these rates apply have not been adjusted in line with inflation. While inflation and average wages are on the rise, the tax-free personal allowance remains unchanged at £12,570, and the basic rate band has been locked at £50,270. This leaves a large proportion of income to be taxed at higher rates as salaries rise.

By freezing the thresholds, the government ensures that more income falls into higher tax brackets, thereby increasing the overall tax burden on workers. While some may argue that this is an effective way to raise government revenue, others view it as a hidden form of taxation, one that does not require an explicit increase in tax rates but still forces workers to contribute more. According to data from the National Institute of Economic and Social Research (NIESR), lower and middle-income households are disproportionately affected by the freeze, particularly in percentage terms.

What Does This Mean for the Economy?

Freezing tax thresholds is not a new tactic. Both Conservative and Labour governments have employed this strategy in the past as a means to raise additional funds for public services. According to the Office for Budget Responsibility, the freeze could generate as much as £56 billion in tax revenue by 2030-31. However, while the policy helps to meet the funding requirements of essential services such as healthcare, education, and welfare, it does so at the expense of wage earners who find themselves paying more without any change to their take-home pay.

The freezing of thresholds also raises questions about the fairness of the UK’s tax system. As wages increase, more workers are forced into the higher tax brackets, with 5.2 million people expected to pay the basic rate of income tax by 2030-31. This increase will affect a wide range of workers, not just high earners. And while the policy is likely to benefit government finances, it also places an additional burden on millions of workers, who may feel the pinch as their disposable income shrinks.