How much frozen income tax bands could cost you as HMRC to rake in extra £52bn by 2028 | Personal Finance | Finance

September’s inflation figure usually determines how much the personal allowance, income tax bands and benefits should increase by each year, but the frozen allowances mean thousands of workers will be left out of pocket.

UK inflation remained unchanged at 6.7 percent in September meaning taxpayers should see an increase in their income due to the rise in benefits and minimum pay.

There was some respite for the average worker this week, as ONS data reported an 8.1 percent increase in total earnings, including bonuses, in the three months to August 2023 compared to the same period in the previous year.

However, this combination of high inflation and rising wages has not been matched by rising tax bands – a detriment to those who have enjoyed pay rises tipping them into a new tax bracket.

The average worker faces another year with the same allowances following a freeze in the tax brackets until the 2027/28 tax year. Frozen tax bands mean that any additional income will be taxed despite the natural rise in costs.

Figures from the Institute of Fiscal Studies (IFS) show frozen income tax and national insurance bands are set to generate the Treasury an extra £52billion a year by 2027/28.

It comes as more workers will be pulled into a higher tax bracket as inflation remains above the Bank of England’s two percent target, and wage growth surges.

The personal allowance has been frozen at £12,570 since 2021, which would have risen to £14,269 for the 2023/24 tax year had it been in line with inflation.

Taking the ONS inflation reading from September into account, the allowance would have risen to £15,225 for 2024/25, according to AJ Bell figures.

Similarly, the higher-rate threshold of £50,270 would stand at £57,053 today, before rising to £60,886.

Laura Suter, head of personal finance at AJ Bell said: “Based on OBR forecasts, if we look ahead to the end of the freeze in 2027/28, someone would have been able to earn almost £61,500 before hitting the higher rate income tax band – over £11,000 more than the actual limit will be.

“It means that someone who was on the average UK salary of £33,000 at the start of the income tax band freeze will be paying £2,576 more in tax over the entire duration of the freeze, assuming average wage increases during that time.”

Someone who was on the average UK salary of £33,000 at the start of the income tax band freeze will pay £2,576 more in tax over the entire duration of the freeze, assuming average wage increases during that time, AJ Bell’s data shows.

Someone earning £50,000 is hit even harder, paying £13,366 more in tax, as they would have avoided the tax band altogether had the freeze not been in place.

Suter said the government freeze had been a “cash cow” for the government but had left a “big dent” in the pockets of workers.

According to the IFS, the number of people paying higher-rate income taxpayers will have trebled from 3million at the end of the last Labour government in 2010 to 9million in 2027. It means one in six adults will soon be paying a higher rate of tax.

Prime Minister Rishi Sunak froze every income tax threshold until 2026 while Chancellor two years ago.

When Jeremy Hunt became Chancellor in October 2022, he extended the freeze for a further two years, resulting in more middle-earning households being dragged into higher-rate tax bands.