Rishi Sunak announced a series of guidelines that made headlines budget Speech to the House of Commons on Wednesday.
Among the programs to stimulate economic growth when the UK emerges from the coronavirus pandemic, the Chancellor has identified a number of new tax policies that will affect people across the UK.
This includes the announcement that the personal tax-free allowance will be frozen – which means that as this Parliament goes on, more people will pay incoming taxes.
This is one of the measures aimed at balancing the books, with UK borrowing at its highest post-war level and current debt around £ 2 trillion.
What is a Tax Free Personal Allowance?
Currently the standard allowance is £ 12,500. This is the amount of income that you don’t have to pay tax on.
Your Personal Allowance may be higher if you apply for the Marriage Allowance or the Blind Allowance. It’s smaller if your income is over £ 100,000 a year.
The threshold above which income tax starts at 20% is set to rise to £ 12,570 in April 2022, which will then be frozen until 2026 – meaning more people will be forced to pay taxes as wages rise.
In their manifesto for the 2019 general election, the Conservatives vowed not to raise income tax, social security contributions or VAT, and this change in policy holds on to that promise.
Some have argued that this effectively increases the tax through the back door, as up to 1.3 million people could pay taxes by freezing personal allowances.
However, the Chancellor said no one would take home less because of the increase.
Rishi Sunak delivers his budget to the House of Commons Photo credit: British Parliament / Jessica Taylor / PA
What about high earners?
Those with the biggest shoulders will bear the greatest burden – meaning those who earn more will have to pay more.
The 40% threshold will be raised by £ 270 to £ 50,270 in April 2022 and then frozen, with measures set to be close to £ 8.2 billion in 2025-2026.
The Institute for Fiscal Studies (IFS) said approximately 1.3 million people would be inducted into the income tax system, with approximately 10% of adults being put into the higher 40 pence rate.
A wage increase could therefore flow more into the higher tax rate.
Budget documents show this is likely to hit the middle to high earner hardest.
The policy adjustment is expected to bring an additional £ 8 billion in taxes to the Treasury Department compared to an increase in thresholds in line with inflation.