Some 4.1mn UK adults under the age of 40 will be pulled into paying higher or additional rate tax by the 2027-28 tax year as a result of the government’s frozen income tax thresholds.
The analysis from Quilter, based on an FOI response from HMRC, found 3.6mn under 40s will be brought into the higher rate of income tax due to the threshold freezes in the tax years 2022-23 to 2027-28, and a further half a million will be brought into the additional rate.
According to Quilter this means more than a fifth those under 40 are expected to be hit by the fiscal drag effect of frozen tax thresholds.
The wealth manager claimed, after Labour revealed a £22bn black hole in public finances, it could use its first Budget to “raid the pockets of taxpayers to help plug it.”
“For those already being pulled into higher income tax brackets as a result of the already frozen income tax thresholds, it could amount to a significant impact on their finances," said Quilter.
“The Labour government now finds itself between a rock and a hard place as while it has pledged not to increase the rate of income tax, it is in effect maintaining the Conservative strategy of increasing income tax by stealth by leaving rates untouched, but it simply cannot afford to thaw them,” it added.
Rachael Griffin, tax and financial planning expert at Quilter thought Labour would “no doubt be quietly” grateful.
She explained: “Frozen income tax thresholds, which show no signs of thawing under the new Labour government, were initially introduced in the 2021-22 tax year until 2025-26 and were expected to create a total of just one million more higher rate taxpayers in this time.
“Now, however, thanks to the extension of the frozen thresholds to the 2027-28 tax year, coupled with higher wages which increased in an attempt to keep up with high inflation, those aged under 40 are expected to more than quadruple the initial target alone.
“Moving into a higher tax bracket in the UK presents both challenges and opportunities. By understanding the implications on allowances, capital gains, savings, and investments, and by strategically planning your finances, you can manage your tax liabilities effectively while continuing to grow your wealth.”
alina.khan@ft.com
