Budget 2021: How does the personal tax allowance freeze hit the pounds in my pocket?
Rishi Sunak announced a series of headline-grabbing policies during his Budget speech to the House of Commons on Wednesday.
Among the schemes aimed at promoting economic growth as the UK emerges from the coronavirus pandemic, the chancellor laid out a series of new tax policies which will effect people across the UK.
This includes the announcement that the personal tax-free allowance will be frozen - meaning more people over the course of this parliament will be paying incoming tax.
It is one of the measures aimed at trying to balance the books, with UK borrowing at its highest post-war levels and current debt standing at around £2 trillion.
What is a tax free personal allowance?
Currently, the standard personal allowance is £12,500. This is the amount of income you do not have to pay tax on.
Your personal allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000 per year.
The threshold at which people start paying income tax at 20% is set to increase to £12,570 in April 2022, which will then be frozen until 2026 - meaning more people will be dragged into paying tax as wages increase.
In their 2019 general election manifesto, the Conservatives vowed not to increase income tax, National Insurance Contributions or VAT, and this tweak to policy sticks to that pledge.
Some have argued this is effectively raising tax by the backdoor, as up to 1.3 million people could be paying tax through the personal allowance freeze.
However the chancellor has said no-one’s take home pay would be any less due to the rise.
What about high earners?
Those with the biggest shoulders will carry the biggest burden - meaning those who earn more, will be expected to pay more.
The 40% rate threshold will increase by £270 to £50,270 in April 2022 and then be frozen, with the measures raking in almost £8.2 billion in 2025-26.
The Institute for Fiscal Studies (IFS) said about 1.3 million people would be brought into the income tax system, with about 10% of adults brought into the higher 40p rate.
So getting a pay rise could pull more into the higher rate of tax.
Budget documents show this is likely to hit middle to higher income earners the hardest.
The policy adjustment is forecast to bring an additional £8 billion in tax to the Treasury, compared to if they had raise the thresholds in line with inflation.