Income Tax 'stealth' freeze explained and how Budget announcement could impact you

Reports suggest Rachel Reeves could usage her Budget connected October 30 to widen the frost connected Income Tax thresholds - thereby dragging much radical into paying taxation for the archetypal time

Millions of radical volition wage much successful Income Tax if Chancellor Rachel Reeves uses her Autumn Budget to frost tax thresholds.

The existent frost is owed to past until 2028, having been introduced by the erstwhile Conservative authorities successful 2022. However, reports from The Financial Times suggest Rachel Reeves could usage her Budget connected October 30 to widen this - thereby dragging much radical into paying taxation for the archetypal time.

Labour antecedently described the frost arsenic a "stealth taxation connected moving people" erstwhile it was announced by then-Chancellor Rishi Sunak soon aft the pandemic. Here is what you request to know.

What is Income Tax?

Income Tax is paid connected net erstwhile you gain supra a definite threshold. You wage the basal complaint of 20% Income Tax connected net supra £12,570 a year. There is simply a higher complaint of 40% which is paid connected net supra £50,270, portion thing supra £125,140 is taxed astatine the 45% further rate.

These rates use successful England, Wales and Northern Ireland. Scotland has a abstracted taxation system. Once you gain much than £100,000, you besides commencement losing the £12,570 tax-free idiosyncratic allowance astatine a complaint of £1 for each £2 that your income goes supra £100,000.

Could Labour widen the Income Tax freeze?

It's been reported that Rachel Reeves is considering extending the existent frost connected Income Tax thresholds by a further 2 years, until 2030. This would rise an further £7billion for the Treasury. However, the process of freezing the thresholds mean much radical volition beryllium dragged into paying taxation - either for the archetypal time, oregon paying much taxation - erstwhile their wages rise.

This process is known arsenic "fiscal drag". The Institute for Fiscal Studies estimates 400,000 would beryllium dragged into paying Income Tax for the archetypal time, portion different 600,000 radical would commencement paying the higher and further rates.

David Denton, method advisor astatine Quilter “While Labour whitethorn not summation income taxation directly, it has been wide reported that the Chancellor is considering expanding the income taxation instrumentality by stealth, freezing thresholds for an further 2 years to the 2029/30 taxation year. If wages accrued by 3% each year, our calculations amusement that idiosyncratic earning £60,000 contiguous could expect to wage an further £3,579 successful income taxation betwixt the 2028-29 and 2029-30 taxation years compared to if allowances had kept up with earnings."

Government sources told the BBC that extending the frost would not breach the Labour manifesto pledge to "not summation taxes connected moving people". This is due to the fact that the rates of Income Tax would stay the same. But arsenic we've mentioned above, radical would inactive wage much successful taxation erstwhile their wages increase. The Treasury does not remark connected Budget speculation.

How astir National Insurance - could this alteration too?

Rachel Reeves is said to beryllium considering a hike to leader National Insurance contributions arsenic portion of her Autumn Budget. Under existent rules, employers wage National Insurance astatine a complaint of 13.8% connected each net supra £175 per week, oregon £9,100 per twelvemonth - but reports suggest the Chancellor could beryllium acceptable to summation this rate.

Pension contributions made by employers are presently exempt from National Insurance. There are reports that suggest this could besides change. Changes to leader National Insurance contributions would not straight interaction people's payslips - but experts suggest firms whitethorn look to mitigate these costs with smaller wage rises oregon hiring freezes.