Cutting NI isn’t enough – Nadhim Zahawi must axe ‘destructive’ income tax freeze

Johnson is 'clear' government is 'looking at tax cuts' says MP

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Former Chancellor Rishi Sunak has bequeathed a five-year freeze on income tax thresholds, as part of his (very mixed) legacy. Unless this punitive decision is reversed, it will cost taxpayers thousands of pounds they desperately need today.

In his Budget in March last year, Sunak froze the level at which Britons start paying income tax until the 2025/26 tax year, in a move that will drive millions into HMRC’s clutches. This “destructive” income tax threshold freeze will prove to be even more punitive than the Government’s decision to add 1.25 percent to National Insurance.

The health and social care levy, designed to pay for long-term care and clearly post-Covid NHS backlog, has lifted the NI rate to 13.25 percent from April 6. Following a public outcry, Sunak softened the blow by lifting the threshold at which we pay NI to £12,570, in line with basic rate 20 percent income tax threshold.

Someone earning £14,000 a year will see their NI bill plunge from £531.84 to £189.48 as a result, saving them £342.37 a year.

A £20,000 earner will see their bill drop from £1,251.84 to £984.48, saving £267.36 a year, figures from accountancy firm HW Fisher show.

Those on higher incomes will save less NI, with a £40,000 earner better off by just £17.36, while someone on £60,000 will pay £232.64 in extra NI, due to the 1.25 percent NI levy.

This is still a welcome move but unless the Government lets income tax thresholds rise in line with inflation once more, the benefits will be wiped out.

With Sunak gone, it is time for new Chancellor Nadhim Zahawi to scrap the freeze, which was introduced before inflation and wages rocketed. This will go a long way towards easing the pressure on cash-strapped households.

Sunak froze the basic rate income tax threshold at £12,570 until 2025, while the higher rate threshold is fixed at £50,270.

As wages rise, people will hand more and more money to HMRC.

The total tax haul will be bigger than even Sunak anticipated, as wage growth is picking up along with inflation, rising 6.8 per cent in the last year.

Someone earning £11,750 this year whose wages grew by that amount would earn £12,549 this year, which means they will pay basic rate income tax at 20 percent for the first time. Similarly, someone earning £47,500 last year will now pay 40 percent tax.

Laura Suter, head of personal finance at AJ Bell, has calculated that the number of higher-rate taxpayers will jump by 44 percent following the “destructive” move.

The picture looks worse over five years.

If uprated in line with inflation, the personal allowance would have hit £15,300 in the 2026/27 tax year. Due to the freeze, it will be just £12,800 instead.

Likewise, the higher rate threshold would have increased to £61,200 in 2026/27, but instead it will stand at just £51,200.

It means a £25,000 earner will pay £1,427 more tax over the next five years, while someone on £50,000 will pay £5,773 more. That is only the start, because even when tax thresholds do start rising they will begin from a much lower base. That’s quite a legacy, Mr Sunak.

This can’t go on. The UK tax burden is already at a 70-year high, while prices rise at an alarming rate.

This week Prime Minister Boris Johnson’s beleaguered Government won rare plaudits, by easing the ill-timed hike in NI.

Yet the really damaging tax attack is doing more harm by the day. Chancellor Zahawi should start his new job by scrapping it.

It is likely to be the most popular thing he will ever do.

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