The biggest tax heist (that you may not have even noticed)

Times

a day ago

In 1977 two Labour backbench MPs joined forces to rebel against the chancellor, Denis Healey. He had plotted to keep income tax thresholds frozen at a time of rampant inflation in what would be a subtle but sizeable tax raid.
Audrey Wise, the MP for Coventry South West at the time, told parliament: 'It is convenient for governments to allow the tax allowances to be eroded, but not convenient for people … it is a rather dishonest system from which we should escape.'
In the end Wise and her colleague Jeffrey Rooker, the MP for Birmingham Perry Barr, won cross-party support and the Rooker-Wise amendment ruled that income tax thresholds should automatically increase in line with inflation.
Nearly 50 years on and politicians desperate to boost Treasury coffers are again guilty of exploiting what is known as fiscal drag to pull off the biggest stealth tax heist yet. Income tax thresholds have been frozen since 2021 and the cost of living has soared more than 20 per cent since then. Millions of workers and pensioners are now paying a higher tax than they would have if the thresholds had kept pace with inflation.
The mastermind was Rishi Sunak, who, as chancellor, put tax thresholds into a deep, five-year freeze, which was then extended until 2028 by Jeremy Hunt. It is now feared that the stealth tax raid will be extended in October as Rachel Reeves tries to fill a widening hole in the nation's finances.
Sunday Times analysis today lays bare the full impact of the big freeze. It shows that:
• Stealth taxes have cost workers the equivalent of a 4p in the pound increase in income tax.• Nurses and primary school teachers will be higher-rate taxpayers by the start of the 2030s.• The full new state pension will trigger an income tax bill by 2027.• A worker earning the average London wage will be a higher-rate taxpayer next year.• A family hit by stamp duty, capital gains tax and inheritance tax could be £100,000 worse off.
Iain Duncan Smith, a former leader of the Conservative Party, said: 'Governments have been hammering people by freezing these thresholds.
'It will end up affecting teachers, nurses and those who generally don't earn vast amounts. Loads of people are now paying higher-rate tax who should never pay it. We should ban the freezing of thresholds — all taxation should be debated publicly and the public should be informed. It shouldn't be snuck through.'
The personal allowance, the amount you can earn a year before paying income tax, has been £12,570 since 2021. If it had increased with inflation, it would be more than £15,500 today, according to the Institute for Fiscal Studies (IFS), a think tank.
The higher-rate threshold, the point at which you start paying 40 per cent tax on earnings above the limit, has been £50,270 since 2021. It would be more than £62,000 today if it had been linked to inflation. Scotland, which has different income tax thresholds and rates, has had a similar freeze.
Isaac Delestre from the IFS said: 'The freeze is unusually long. Previous governments have frozen the thresholds for two or three years. And it has been over a period of remarkably high inflation. The £40 billion it is going to raise is a huge tax increase.'
• How the top tax rate became a middle-class problem
The freeze means that an extra 4.2 million people will have to pay income tax by 2029-30 according to the Office for Budget Responsibility. An extra 3.5 million people will become higher or additional-rate taxpayers.
The IFS said that by the 2027-2028 tax year the freeze will be raising £40 billion a year for the Treasury — almost the same as if 4p in the pound had been added to all income tax rates.
Nimesh Shah from the accountancy firm Blick Rothenberg said: 'If a chancellor had announced a 4p increase to income tax rates, it is highly unlikely they would still be in a job.
'This brings home the underhand way the government is increasing the tax burden on lower and middle earners by the back door.'
Our analysis shows that since the threshold freeze the average salary of vets, police officers and secondary school teachers has passed the higher-rate threshold, meaning these workers now pay 40p of any extra pound they earn in income tax.
If the threshold remains frozen, electricians, nurses, fire service officers and primary school teachers will be paying higher rate tax by 2031.
Before the general election last year, Labour promised not to increase taxes for 'working people'. However, the economist Julian Jessop, formerly of the Institute of Economic Affairs, a free market think tank, said: 'It is almost certain that Rachel Reeves will extend the freeze on personal tax thresholds in the autumn budget, which would hurt working people by taking more money out of their payslips and be a clear breach of the promises made in Labour's manifesto.
'We need much more honest conversations about tax. The constant scrambling to find more revenues in ways that are neither fair nor transparent is damaging for the economy and for confidence in the political system.'
Pensioners have also been hit because the state pension is increased every year by the triple lock. This means that it rises by the highest of 2.5 per cent, average wage growth or inflation each year.
• Is Britain a high-tax nation compared with other countries?
While a welcome boost for pensioners' incomes, the frozen thresholds mean that, even with the smallest possible rise of 2.5 per cent a year, from April 2027 pensioners who get the full new state pension will have to return a portion of it in tax. It also means that they will pay more tax on any income from private or workplace pensions.
The tactic of freezing thresholds rather than raising tax rates to boost the Treasury coffers is not limited to income tax. Some thresholds have been held at the same level for years, and one has even been stuck since 1981.
Six have stayed the same since at least 2021 when the income tax freeze began. A seventh, the additional-rate income tax threshold, has been frozen since 2023, when it was made less generous by Jeremy Hunt.
The gifting allowance, the amount you can give each year that will immediately fall out of your estate for inheritance tax purposes, has been fixed at £3,000 since 1981. If it had been adjusted by inflation, it would be worth more than £11,500 today.
The inheritance tax nil-rate band, the amount you can pass on tax-free when you die, has been £325,000 since 2009 and the residence nil-rate band, the extra allowance you can get if you pass on your main home to a direct descendant, has been £175,000 since 2020. If they had gone up with inflation, your total inheritance tax-free allowance would be about £740,000.
Other thresholds, such as the dividend tax and capital gains tax allowances, have been reduced.
The accountancy firm Moore Kingston Smith found that a sample family could have paid nearly two and a half times as much tax than they would if thresholds had kept up with prices.
• Why Rachel Reeves's state pension headache is about to get worse
Say a couple in 2020 earn £45,000 and £90,000. Their wages go up 3 per cent a year. In 2023 they inherit an estate including a property worth £750,000. They buy a new main home in 2024 worth £500,000, then in April 2025 they sell the inherited property, which had grown £50,000 in value. They also get interest of £2,000 a year from a savings account and dividend payments of £1,500 a year, both from assets held outside a tax-free Isa wrapper.
They would have paid about £289,300 in tax since 2020. If income tax rates, inheritance tax thresholds and savings allowances had gone up with inflation since then, stamp duty limits had been linked to house prices and capital gains and dividend allowances hadn't been cut, the couple would have paid just under £190,000, according to Moore Kingston Smith.
Guy Sterling from Moore Kingston Smith said: 'Cunningly, like a frog being brought slowly to the boil and not noticing, the decision to not increase personal tax allowances and other tax thresholds has increased the taxes people pay — but without the difficult-to-ignore increase in the headline rates of tax.
'Pay rises are being more than eaten up by these stealth taxes and cost of living increases, leaving workers and their families worse off in real terms.'
The Treasury said: 'This government inherited the previous government's policy of frozen tax thresholds. At the budget and the spring statement the chancellor announced that we would not extend that freeze. We are also protecting working people by keeping our promise to not raise basic, higher or additional rates of tax, employee national insurance or VAT.'