How exactly does the freeze in tax allowance cause an increase in income tax for key workers?

3 comments

1. It’s actually a tax increase for everyone—but if you were in the old 45% bracket then the 45% to 40% slash offsets it.

   It’s best explained with a simple example.

   Let’s say you earn £12.5k in 2020. You actually take home £12.5k because every pound you earn up to £12.5k is within your “tax-free allowance”. Zero tax due!

   Okay so let’s say we now get 10% inflation between 2020 and 2022 (which is what just happened) and you make £12.5k again. You pay no tax but you have actually earned LESS money because £12.5k in 2022 pounds roughly £11.4k. You still owe no tax but you have less REAL money. £12.5K 2022 pounds only gets you what £11.4k would have gotten you in 2020.

   Now let’s say your pay “increased” with inflation (which it should, and does on average in the long run albeit messily). 110% of £12.5k is £13.75k. You make £13.75k in 2022. This has the exact same BUYING POWER (which is what really matters) as £12k in 2020. You effectively earned the same, and your pay “increase” is symbolic.

   The tax-free allowance in 2020 was £12k so you make £12k and kept £12k. However in 2022 you make £13.75k (£12k in 2020 dollars) and now OWE 20% income tax on £13.75k – £12k which amounts to £350 (£318 in 2020 pounds). So let’s finally convert everything to 2020 dollars and look at what happened in 2020 and 2022:

   **2020: Earned £12.5k, paid £0 tax**

   **2022: Earned £12.5k (IN 2020 POUNDS), paid £318 tax (IN 2020 POUNDS).**

   This is why the tax free allowance is supposed to go up with inflation. Refusing to pace it along with inflation is mathematically identical to a tax increase. And this happens to everyone, even bankers. Bankers (actually, anyone) who makes over £150k now pay 5% less income tax on everything they earned over £150k than they did before. But they were also vulnerable to the stealth tax of inflation. A banker earning £151k is also paying extra tax. The cutoff comes a bit later.

   https://taxdude.substack.com/p/inflation-is-a-double-stealth-tax

2. It’s slightly misleading. I think it’s intimating they will pay more after annual increase as the allowances are frozen they will take home more, but nothing like inflation. Good budget for rich people

3. You pay tax on the proportion of your salary above the threshold.

   If the threshold is frozen, and your salary increases, you will pay tax on a bigger proportion of your salary and pay more tax overall.

   You’ll still have more money coming in, but you’ll also pay more tax than you would have done if the threshold had also risen.