Tax threshold freeze has almost tripled in size since its initial costings, with next year’s freeze set to net £12 billion

The size of the UK’s ‘stealth tax’ threshold freeze over six years has almost trebled to £25 billion, compared to the £9 billion forecast when it was originally announced in the 2021 Budget, and later extended, according to new Resolution Foundation analysis published today (Saturday). 

Happy new tax year, 2023! examines the personal tax and benefit changes that will take effect in April 2023 at the start of the new fiscal year and analyses what they mean for households.

The biggest personal tax change actually involves no change at all: the Chancellor is freezing the income tax personal allowance at £12,570 and the threshold for the higher rate of income tax at £50,270 – instead of uprating them in line with last September’s inflation figure of 10.1 per cent. Next year’s freeze alone is set to raise £12 billion a year by the time of the final freeze in 2027-28. These thresholds have now been frozen since 2021-22, and are set to remain frozen until April 2028. That six-year freeze is set to raise £25 billion by 2027-28 – almost triple the £9 billion forecast when it was announced in March 2021 and extended by a further two years in the 2022 Autumn Statement.

Most benefits and the state pension, on the other hand, are rising by 10.1 per cent. The state pension will rise by £750, while a single person receiving Universal Credit will get £400 more in 2023-24 than 2022-23. Despite these cash increases, basic benefit levels have still not kept pace with the rise in the cost of living since the start of 2021, and aren’t set to catch up until April 2024, when benefits are expected to be uprated by around a further 5 per cent.

8.1 million households receiving means-tested benefits will also benefit from enhanced Cost of Living Payments in 2023-24, worth £900 over the next year, equivalent to £75 per month. Pensioners and those receiving disability benefits will also see their additional payments repeated in 2023-24. And around 1.7 million workers are set to directly benefit when the National Living Wage rises by 9.7 per cent, the third highest annual percentage rise in the 24-year history of the UK minimum wage.

These increases will be crucial for low-income households to cover rising costs, including those driven by other policy choices. The average Band D Council Tax bill in England will rise by 5.1 per cent in April, equivalent to £99, while low-income households that rent remain under pressure from the continued freeze of the Local Housing Allowance, which is anchored at 2019 rental price levels, despite rents rising by more than 10 per cent in some areas – such as East Cheshire and Central Greater Manchester – since then.

But higher-income households will bear the brunt of April’s tax changes. The starting point for the top rate of income tax is set to fall from £150,000 to £125,140, while the dividend allowance and Capital Gains Tax Annual Exempt Amount are being cut. The reduction in income tax thresholds and dividend allowance will cost the top 5 per cent of the population £2,000 on average, equivalent to an around 1 per cent income reduction.

The Foundation notes that, taken together, the tax and benefit changes taking place from April will provide significant support for lower-income households during the cost-of-living crisis. The poorest tenth of the population are set to gain £500 on average next year, compared to a loss of £100 for a typical household, and a loss of £1,500 for the richest tenth.

The Foundation says that the changes coming into effect this year highlight the challenges of such a patchwork approach to tax and benefit policy. Welcome short-term schemes such as the Cost of Living Payments are needed to supplement what is an inadequate safety net, while personal tax rises are largely implemented through stealth threshold freezes and devolved council tax increases.

Governments and policymakers will face difficult decisions on tax policy if they want to deliver a higher-growth, lower-inequality economy, but this requires having serious and honest conversations with the electorate about the trade-offs involved.

Adam Corlett, Principal Economist at the Resolution Foundation, said:

“High inflation has pushed up the projected revenue take from the Government’s personal tax threshold freeze to £25 billion a year – almost triple the amount forecast when the freeze was introduced. But higher-income households will be the ones most affected by next year’s major tax rises. 

“High inflation also means benefits are being uprated by 10.1 in April, which will boost low-income households’ finances, although benefits are only set to fully catch up with price rises after April 2024’s uprating.

“The myriad of tax and benefit changes introduced this April highlight the challenges of such a patchwork approach to policy, which relies on short-term support schemes, stealth tax rises, and an unfair council tax system. Difficult decisions on tax and spending policies lie ahead, but policymakers should be honest with voters about the trade-offs of these decisions.”