UK workers guaranteed to lose £14,831 to income tax rise 'by the back door'

Workers across the UK have lost thousands of pounds to extra tax 'by the back door' since 2021 - and could lose even more before the end of the decade.

Talk of tax hikes has swept the country in the past week since Chancellor Rachel Reeves took the unprecedented step of making a pre-Budget speech to lay the foundations for a potentially manifesto breaking portfolio of tax increases later this month.

With talk of possible Income Tax or National Insurance tax increases on the table - despite previous promises - financial experts have also pointed to another stealth tax hike which has been happening every year for the past five years, and is set to continue for at least another three.

Income tax thresholds have been frozen since 2021, with successive Chancellors refusing to increase them. Currently, the bands will not be touched until at least 2028.

Income tax bands define how much tax someone pays on their earnings. The Personal Allowance is set at £12,570, meaning there is no tax to pay if you earn less than this.

Then, you pay 20% on earnings between £12,571 and £50,270, and 40% on every £1 earned from £50,271 to £125,139, then the top rate is 45% on earnings of £125,140.

But these have remained the same since 2021, which means that as you earn more, such as through inflation-based pay rises, you pay more and more tax and could even go up to the next tax bracket on some of your earnings.

According to Laura Suter, Head of Personal Finance at AJ Bell, the freeze will cost a worker earning £50,000 in 2021 as much as £4,476 by 2030.

She said: "The Conservatives started the policy of freezing income tax bands as a stealth way to raise taxes, and Labour has opted to maintain it. But it could also extend this freeze.

"The move means that income tax bands haven't increased with inflation each year, and instead have remained stuck at the same levels since 2021. So, people pay more tax than they otherwise would have if tax bands had risen with inflation - particularly during the recent periods of high inflation.

"The freeze is currently due to last until 2028, but Labour could extend it to 2030 or beyond. The move is an effective tax increase but through the back door, as people don't realise how much extra they are paying.

"For example, the Personal Allowance is still at £12,570 but would have risen to £15,550 in this tax year if it had increased with inflation in the past few years. Equally the higher-rate threshold would have risen from £50,270 to almost £62,200 in the current tax year.

"Someone earning £50,000 at the start of the income tax freeze in 2021 would have paid an extra £14,831 in tax by the end of the freeze in 2028*"

Things will get even worse if Ms Reeves decides to extend that freeze further to 2030.

She added: "If Reeves decides to extend that freeze, for example to 2030, then that extra tax paid increases to £23,449. In other words, working people will have racked up higher tax bills during this time."

The National Institute of Economic and Social Research, a major economic think tank, said the Chancellor must plug a £50 billion black hole in the nation's public finances and give herself a larger fiscal headroom.

It suggested a 2p rise in income tax was likely needed to address the hole, echoing a similar suggestion by the Resolution Foundation, another think tank which has been influential upon the Government's thinking.

In an unusual speech just three weeks out from the major fiscal statement, the Chancellor on Tuesday would not commit to Labour's manifesto promises not to raise income tax, national insurance or VAT, fuelling speculation.