The implications of the higher rate threshold freeze

By 2025/26, one in six taxpayers could be paying above basic rate.

Cast your mind back to 2019 and the start of the Conservative Party’s contest to find a new leader. The headline of that first day was a proposal from one of the then many candidates to raise the higher rate threshold to £80,000. The candidate who put that idea forward went on to win the contest: Boris Johnson.

Last week’s Budget makes that £80,000 threshold appear even more distant than it did two years ago. Rishi Sunak, Mr Johnson’s second Chancellor (but the first to deliver a Budget) has parked the higher rate threshold at £50,270 from 2021/22 through to 2025/26. The freezing of the personal allowance and higher rate threshold will add nearly £8.2bn to the Treasury’s coffers by 2025/26.

More higher and additional rate taxpayers

NB No reliable numbers yet for 2020/21 and 2021/22 because of the pandemic.

Working through the numbers, Treasury papers and external research, some other facts emerge:

  • By 2025/26 there will be 4.3m higher rate taxpayers and 591,000 additional rate taxpayers – a total of 4.9m in round numbers
  • While that total is only marginally above the 2015/16 level (before the brakes were taken off the higher rate threshold), the population of additional rate taxpayers will be 63% higher
  • According to calculations from the Institute for Fiscal Studies (IFS), 11% of adults (1 in 6 of all taxpayers) will be paying higher/additional rate by 2025/26
  • The IFS also calculates that in inflation-adjusted terms, by 2025/26 the higher rate threshold will be worth about as much as it was in 1990/91 and around 20% less than in 2009/10
  • One easy point to overlook is that the freeze locks in a permanent saving for the Treasury. So, even when/if indexation resumes in 2026/27, the four year freeze will continue to save the Exchequer £8bn+ a year because the future increases begin from a 2021/22 base

At the lower end of the income scale, freezing the personal allowance will drag 1.3m more people into tax by 2025/26 – a far cry from the last decade when Chancellors focussed on the numbers removed from tax.

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Source: Techlink

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