Low paid and pensioners hit by threshold freeze – Daily Business

More minimum wage workers and pensioners are being dragged into paying tax that will wipe out some of the gains from higher pay and pensions, according to new data.

Income tax thresholds and national insurance contributions are set to remain frozen until April 2028 and if the Chancellor extends that by a further two years it would raise an additional £8.3bn for the Exchequer, says the Institute for Fiscal Studies.

However, more minimum wage workers are being pulled into tax due to a combination of the tax threshold freezes and substantial minimum wage rises.

Under an extension to 2029–30, a minimum wage worker would need to work just 18 hours per week to be liable for income tax – the lowest level since the minimum wage was introduced in 1999.

One consequence of this is to reduce how much of a minimum wage rise goes to workers, with more of the pay rise being recouped by the Exchequer in the form of tax.

For the first time since its introduction, the full new state pension is set to exceed the income tax personal allowance in 2027–28. In 2022–23, just under half of those on the full new state pension paid tax on their incomes. By 2027–28, all them will do so.

Extending the freezes to 2029–30 would see the number of income tax payers in families entitled to universal credit rise to 3.1 million, 110,000 more than under current policy and 690,000 more than if there had been no freezes.

Matthew Oulton, a research economist at IFS, said: “The freezes to personal tax thresholds have already represented a huge tax rise.

“Extending them would raise significant revenue in a broad-based and progressive way.

“It would increase tax on all employees working full-time, most working part-time, most minimum wage workers and many low-income pensioners.

“The Chancellor may well want to raise more revenue and change who pays tax, and changing thresholds is a reasonable tool to use. But freezes set many years in advance are not – how big the tax rise turns out to be depends upon the unknown and unpredictable path of inflation.”