Britain’s record tax rise on incomes is set to raise £40 billion a year by the middle of the next Parliament

A higher outlook for inflation since the Budget last March means that the Government’s six-year freeze to Income Tax and National Insurance thresholds is set to raise £40 billion a year by the time it is fully rolled out in 2027-28, making it Britain’s biggest tax rise on incomes in at least 50 years, new analysis from the Resolution Foundation shows today (Friday).

A four-year freeze in personal tax thresholds – the Personal Tax Allowance and Higher Rate Thresholds for Income Tax – was first announced in Budget 2021. At the time, it was forecast to raise £8 billion a year once fully rolled-out in 2025-26. In Autumn Statement 2022, this was supplemented by a two-year extension of the policy through to 2027-28, and the addition of an employer National Insurance threshold freeze (raising £6 billion).

The more recent inflation shock has vastly increased the size of this tax rise. The Foundation notes at the time of the Budget in March, the Office for Budget Responsibility had forecast CPI inflation to have fallen to 5.4 per cent by September 2023 – the figure that would normally be used to uprate tax thresholds the following tax year. However, inflation has proven stickier than expected. The latest Bank of England forecast from August suggests that inflation will be 6.9 per cent in September – significantly higher than the OBR’s earlier forecast.

The Office for Budget Responsibility also forecast CPI inflation to fall significantly below target in future years, with only 1 per cent inflation in total over the three years from Q3 2023 to Q3 2026. But the Bank of England now forecasts that inflation will total 6 per cent over this period.

At the time of the Budget in March, this policy was set to raise £30 billion in 2027-28 – already vastly more than originally forecast. But using the Bank’s latest inflation forecasts, the Foundation calculates that the policy will now raise £40 billion a year by the time it is fully rolled out in 2027-28. Had the Government uprated the Personal Tax Allowance with inflation over this period, people would have started paying Income Tax at around £16,200, rather the current threshold of £12,570 which is set remain at this level until April 2028. This means an additional £720 in Income Tax for most basic rate taxpayers.

As politicians consider options for pre-election tax giveaways, the Foundation notes that no plausible change is likely to come close to matching the size of this six-year £40 billion tax rise, which has affected all of the country’s 36 million Income Tax payers.

Adam Corlett, Principal Economist at the Resolution Foundation, said:

“Abandoning the usual uprating of tax thresholds is a tried and tested way for governments of all stripes to raise revenue in a stealthy way.

“But it is the far bigger than anticipated scale of the Government’s £40 billion stealth tax rise that stands out.

“The reality of the largest, and ongoing, tax rise on incomes in at least 50 years is why any talk of pre-election tax cuts will inevitably be seen in the wider context of some far bigger tax rises.”