Thousands of Britons are at risk of being “punished” by HM Revenue and Customers (HMRC) as Rachel Reeves could extend the current freeze on tax thresholds, analysts are warning.
Taxpayers face another year of frozen allowances that effectively increase their tax burden without changing headline rates, otherwise known as fiscal drag.
Experts are warning about the impact of frozen tax thresholds
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AJ Bell pensions and savings expert, Charlene Young, explains the impact: “Frozen tax thresholds punish taxpayers by stealth. When asset prices and wages rise but thresholds fail to track inflation, the result is higher tax bills.”
“Employees face yet another year of frozen thresholds come April. It means another year when our tax bills are set to go up, despite the headline tax rate remaining the same,” she adds.
By April 2025, we will be over halfway through the planned freeze on income tax thresholds, which is set to end in 2028.
However, Young notes there has been “speculation Government may yet look to extend the freeze again” in the upcoming Spring Budget.
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The inheritance tax freeze is particularly severe, with Young pointing out: “Astonishingly, the main inheritance tax free threshold won’t have changed in over two decades by the time the freeze is lifted in 2030.”
Despite the introduction of the residence nil rate band, this has not fully compensated for the impact of frozen thresholds.
Young calculates that if the inheritance tax allowance had simply been indexed to CPI inflation over the past 20 years, “the tax-free limit would be almost £1.1million for a married couple by 2030”.
This would exceed the combined nil rate band and residence nil rate band, “illustrating that the freeze has cost taxpayers, despite the introduction of a new IHT exemption.”
Looking ahead, Aegon’s pensions director Steven Cameron predicts “Spring Statement silence” on pensions at the upcoming March 26 announcement.
However, he warns that the Chancellor may use the statement to “set the ‘mood music’ for the future direction of travel on tax and spending policy”.
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One possibility Cameron highlights is “an extension of the freeze on personal allowances which will drag even more pensioners into paying higher income tax rates””
While pensions may not feature prominently in the Spring Statement, the Government has “radical plans for pensions” expected in the coming months.
This reform is expected to be outlined in the upcoming Pensions Investment Review and summer’s Pension Schemes Bill.
Reeves will unveil the Government’s latest plan for the economy in next week’s Budget on March 26.
