Income tax threshold freeze to impact Britons as inflation is ‘very high’ | Personal Finance | Finance

However, the implementation of fiscal drag is likely to impact people in a double hit. Fiscal drag occurs when tax thresholds and allowances do not keep up with inflation or wage growth.

With the Chancellor Jeremy Hunt taking the decision to freeze income tax thresholds until 2028 amid a high inflationary environment, the tax burden for Britons is likely to be higher.

This is because larger numbers of people are set to be dragged into a higher tax bracket as inflation increases their income. 

Many experts view frozen thresholds as a “stealth tax”, impacting large numbers of Britons in a specific way.

Losing more of one’s income to tax is something most people will want to avoid.

READ MORE: ‘Impact of inflation’ can’t be ignored by state pensioners

In addition, people do not need to declare this income on tax Self Assessment forms. 

Mr Hunt justified the tax threshold freeze, stating it would be a “difficult decision”.

However, he added: “Although my decisions today do lead to a substantial tax increase, we have not raised headline rates of taxation, and tax as a percentage of GDP will increase by just one percent over the next five years.”

He has reduced the threshold at which the 45 percent tax rate becomes payable from £150,000 to £125,140.

Mr Hunt also explained: “I am maintaining at current levels the income tax personal allowance, higher rate threshold, main national insurance thresholds and the inheritance tax thresholds for a further two years taking us to April 2028.

“Even after that, we will still have the most generous set of tax-free allowances of any G7 country.”

The decision superseded that of former Chancellor, and current Prime Minister Rishi Sunak who decided to freeze allowances until 2026.