Three million workers will be dragged into higher income tax bands if the freeze on thresholds is extended until 2027-2028.
Prime Minister Rishi Sunak is reportedly considering extending the current freeze on income tax thresholds and allowances until 2027-28. A two-year extension, currently in place until 2025-26, would generate an extra £4bn to £5bn in tax revenues for the Treasury, according to the Institute for Fiscal Studies think tank.
The Centre for Economics and Business Research, another think tank, said the move would mean three million workers paid more income tax, including 2.2 million who would have to pay higher rate tax or additional rate tax for the first time.
Financial advice firm NFU Mutual said freezing the personal allowance and higher-rate threshold until 2028 would add £14,990 to the income tax bill of a worker on a £60,000 salary over the next five years.
It calculated the worker would pay £85,787 in tax versus £70,797 if tax bands moved in line with its wage predictions. For 2026-27 and 2027-28 alone, the worker would lose £8,111 if the stealth tax raid was extended.
The calculations assume inflation is at 10pc for 2023-24 and then steadily declines until reaching 2pc in 2027-28.
A worker on £100,000 would forfeit an additional £35,836 in income tax over the next five years if there was an extended freeze to tax allowances, of which £18,169 would be lost during the two-year extension. A worker on a £30,000 salary would pay £3,000 between now and 2028, of which £1,623 would be paid in the 2026-27 and 2027-28 tax years.
Then-chancellor Mr Sunak announced his plans to freeze tax bands at the Budget in March 2021. His income tax freeze was expected to raise £8bn for the Exchequer, but this was when the UK was in a low-inflation environment. With inflation soaring the Bank of England now forecasts the freeze will generate £30bn in total – almost four times the original estimate.
Despite promising high-profile tax cuts during his time as chancellor, Mr Sunak oversaw the biggest increase in the tax burden since the 1970s. HM Revenue & Customs reported earlier this year that the number of people paying 40pc or 45pc tax has risen from 4.25 million to 6.1 million workers since 2019 as thresholds have been frozen.
John O’Connell, of the Taxpayers’ Alliance lobby group, said Mr Sunak must commit to raising the thresholds in line with inflation.
“Increased thresholds are an effective way to lift those on the lowest incomes out of tax, incentivising employment and boosting the economy,” he said. “By wanting to freeze the thresholds at a time of high inflation, the chancellor risks balancing the books on the backs of the poorest.”
Sean McCann, of NFU Mutual, said: “This is known as fiscal drag and is a very effective way of raising money without increasing tax rates.
“Freezing income tax thresholds until 2028 will have a significant impact on income tax bills as wages increase. Not only will many get dragged into paying 40pc and 45pc tax, more will start to lose the tax free personal allowance if the taper threshold remains frozen at £100,000.”
A Treasury spokesman said: “We do not comment on speculation around tax changes outside of fiscal events.”