frozen tax thresholds, USA News (London): Britain’s households face a fresh squeeze on living standards despite a series of Budget giveaways, with frozen tax thresholds set to drag millions of more people into paying income tax and into higher tax bands. The Chancellor’s first Budget saw him preside over a raft of giveaways, including a surprise £100 cash payment into the bank accounts of up to 20 million households in council tax bands A to D in England to help with energy costs. Similar support will also apply to households in the rest of the UK.
However, the Institute for Fiscal Studies (IFS) warned that it was a “fiddly” Budget, with “very little that will move the dial on growth”. It pointed out that the Office for Budget Responsibility had downgraded household income growth in this Parliament from 0.7 per cent to 0.4 per cent, the second worst since 1979, with only the last Parliament worse. Economists also pointed out that energy relief measures, including the scrapping of the standing charge, would be more than offset by an effective tax rise as income tax thresholds remain frozen.
Stealth Taxes and Financial Impact
Analysis for The i Paper by tax consultancy Blick Rothenberg suggests that frozen income tax thresholds will leave people earning between £20,000 and £50,000 facing an extra tax hit of £717 in 2026-27, rising to £814 in 2027-28. For someone earning £60,000, the estimated figure rises from £2,079 to £2,177, while those earning between £70,000 and £100,000 face a hit of £2,151 this year, increasing to £2,443 next year.
The effect, known as fiscal drag, occurs when tax thresholds remain frozen while wages rise. Forecasts show that by 2031-32, 6.7 million more people will be paying income tax and 5.4 million more will be paying the higher rate than if thresholds had risen in line with inflation. The freeze, introduced by the Conservatives in 2021 and extended by Rachel Reeves until 2031, is set to bring millions more into the Exchequer and push more earners into the 40 per cent band. A Liberal Democrats spokesperson stated that the last thing millions need is a massive stealth tax penalty as energy bills rise and inflation soars.
Grim Picture of Living Standards
The Office for Budget Responsibility (OBR) painted a grim picture of living standards, forecasting that households will be little better off than before the Covid-19 pandemic. Real household disposable income per person is projected to be just 1 per cent higher in 2030 than a decade earlier. Professor David Miles of the OBR noted that this stagnation is largely driven by very big increases in energy prices following Russia’s invasion of Ukraine in 2022 and the closure of the Strait of Hormuz. More optimistically, the watchdog predicted annual GDP growth could hit 1.8 per cent in 2029.
Breathing Space and Pension Measures
The Chancellor repeatedly promised to give struggling households breathing space during his address, using the phrase 13 times. On pensions, he introduced a new allowance from April 2027 to prevent pensioners whose only income is the state pension from being dragged into paying income tax. He also reversed Rachel Reeves’s plan to cut the annual cash ISA allowance from £20,000 to £12,000. However, tax rates on savings interest and rental income will rise by two percentage points at each tax band from April 2027. Questions also remain over welfare reform and funding the commitment to increase defence spending to 2.5 per cent of GDP by 2027.
