Freezing personal tax thresholds is ‘tax rise in all but name’ warns expert

With the upcoming Budget on 26 November, taxpayers are being warned to brace for the ongoing impact of a ‘stealth tax’ – a measure that could see millions pay more tax in the coming years without any formal increase in tax rates.

If personal tax thresholds remain frozen until 2028, as previously set out, taxpayers risk being dragged into higher tax bands. There has also been speculation that the Chancellor may extend this freeze until 2030, worsening the effect.

While thresholds remain static – and wages continue to rise due to inflation and cost-of-living pressures – more people are dragged into higher tax bands, which is known as fiscal drag.

More workers sucked into higher tax brackets can mean:

Basic-rate taxpayers might become higher-rate taxpayers
Those already near the edges of a band risk moving into the next bracket
Those with incomes below the personal allowance may find themselves falling into the basic income tax band

Along with employees, this can also impact sole traders – and, if dividend tax thresholds remain frozen – company directors, who pay themselves a combination of salary and dividends via their business.

Expected tax rises – stealth or not – sit against a backdrop of increased effort from the government to prevent tax avoidance and non-compliance.

Seb Maley, CEO of tax insurance provider, Qdos, said, “Freezing tax thresholds is a tax rise in all but name. So much of the lead-up to this budget has been centred around potentially raising income tax rates. And while this speculation has died down, the fact remains, if thresholds stay the same, millions could be hit with a tax rise in the coming years due to fiscal drag.

“Another major consideration is HMRC’s compliance activity. Again, it’s not a tax rise, but the reality is that in recent Budgets, more money has been invested in HMRC – as the government targets non-compliance among taxpayers and businesses. As a result, the tax office has never been in a better place to spot mistakes, inaccuracies and undeclared income.

“It means being on top of your tax obligations is paramount, particularly if – as expected – the government decides to keep personal tax thresholds frozen.”