Taxes are forcecast to reach record highs under Chancellor Rachel Reeves (Image: Getty)
Four million people will be dragged into higher rates of income tax as a result of stealth tax on wages. Watchdog the Office for Budget Responsibility has estimated that 4.1million extra people will find themselves paying either the 40p rate or 45p rate of income tax because of a freeze in tax thresholds. The freeze means that some workers will start paying a higher rate just because of the effect of inflation.
In addition, some workers on low pay will become liable for income tax for the first time. The OBR says the Treasury will take an extra ￡51 billion each year in total by the end of the decade. The hike comes despite Labour’s pledge not to increase income tax. However it’s a result of a six-year freeze in thresholds introduced by the last Conservative government which Labour has continued. The freeze is due to come to an end in 2027-28 - but speculation is mounting that Chancellor Rachel Reeves could extend it, in an effort to raise more money and tackle the nation’s soaring national debt.
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The Office for Budget Responsibility warned that taxes would reach record highs under the present Government. It said: “Tax as a share of GDP is forecast to rise from 35.3 per cent this year to a historic high of 37.7 per cent in 2027-28 and remain at a high level for the rest of the forecast.”
This is partly due to the threshold freeze and to the increase in employer National Insurance contributions announced by Ms Reeves last year.
One side-effect of the threshold freeze is that state pensions could become taxable for the first time even if they are a person’s only source of income.
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Jon Greer, head of retirement policy at financial advisers Quilter, said: “The OBR’s latest forecasts confirm we are fast approaching a bizarre tax cliff edge for pensioners. With the state pension forecast to rise by 4.6% in April 2026 under the triple lock, it will land just below the frozen personal allowance.
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“That leaves the UK potentially only one year away from pensioners having to effectively hand a portion of their state pension back to the Exchequer in tax, which to many would seem perverse.”
He added: “This situation is the result of the triple lock producing some significant increases in the state pension due to high inflation and earning figures while the government has failed to uprate tax thresholds in tandem.”
But he warned the Government could respond by reviewing the triple lock policy.