There is something insidious about taxing by stealth. Gordon Brown was frequently accused of raising taxes by freezing personal allowances, in preference to increasing the headline tax rate, and letting inflation do the hard work for him.
By adopting a Lib Dem manifesto pledge, the 2010 coalition government reversed much of this. Sadly our current Chancellor of the Exchequer now seems destined to go one better than Mr Brown, both by freezing allowances for longer and doing so at a time of high inflation.
It means households are having to cope with being hit from two directions at once. Clearly we face rapidly rising living costs with the Bank of England expecting inflation to hit 8pc, and with some economists expecting it to go even higher.
Meanwhile the Office for Budget Responsibility, the official forecaster, is projecting income tax receipts will grow this tax year by 9pc to from £225bn to £245bn. That works out at an extra £700 for each of the 27 million UK households, largely as a consequence of these frozen personal allowances.
It gets worse because the freeze is set to last for four years to April 2026 by which time additional income tax is expected to cost the average household over £2,000 a year. And don’t forget the new “health and social care levy”, which applies from tomorrow, which at £19bn will set the average household back another £700 a year or so.
Freezing allowances and thresholds brings more people into tax and also increases the number paying higher rates. For example, the £100,000 threshold at which personal allowances are reduced, set twelve years ago, would now be almost £130,000 adjusted for inflation. Likewise the additional rate threshold of £150,000 set at the same time would now be about £200,000.
There are many more examples of frozen allowances taking money out of our pockets. In January 2013 the “High Income Child Benefit” tax charge was set to apply at incomes over £50,000. Adjusted for inflation this threshold should only apply once income of £60,000 is reached, but I fear that this is another threshold which will remain frozen.
In April 2015 the 0pc starting-rate tax band for savings was introduced at £5,000, where it has remained. Adjusted for inflation it should now be £6,000. Likewise the frozen £1,000 savings and property allowances introduced in April 2016 should now be £1,150.
It is worse for dividends because when at the same time the chancellor decided that basic-rate taxpayers should suffer tax on dividends he introduced a £5,000 allowance to soften the blow. Instead of indexing this for inflation to £5,800 it has actually been cut to £2,000.
For those on higher incomes the restriction on annual pension contributions would also be less restrictive if the annual contribution limit of £40,000 had been raised to £46,000 where it should be.
You will notice straight away the extra income tax taken from your pay packets but for many older people inheritance tax could be a bigger worry. The current threshold of £325,000 set in 2009, when only 2.5pc of estates were caught for the tax, is to remain frozen at that level until 2026. Increased for inflation it should now be £435,000. With rising house prices and a frozen threshold it is unsurprising that IHT is projected to raise £8.3bn in the 2026-27 tax year, up from just £2.4bn in 2009-10, a 3.5 fold increase.
The inheritance tax annual gifts exemption of £3,000 was set way back in 1981 and would now be £13,000 adjusted for inflation. We still have the small gifts exemption of £250 and gifts in consideration of marriage exemption of £5,000. I am not sure how executors are expected to deal with such small amounts and in my view these should either be set at their inflation adjusted levels or abolished altogether in the name of simplification.
The VAT registration threshold historically increased with inflation, reaching £85,000 in April 2017, but there it has remained. Today it should be over £95,000. Now Rishi Sunak has decided that it will stay at that level until April 2024.
The threshold exists to allow sole traders without employees to operate free of VAT where they are essentially just selling their own time and materials. However, with the registration threshold frozen for six years at a time of high inflation, more traders will be dragged into the VAT net.
I recognise traders operating above the threshold sometimes complain about being undercut by those who are not registered but I see it as a way of helping young businesses to become established. I have also seen evidence that some sole traders are delaying sending invoices or even refusing to take on new work for fear of going over the registration threshold. With the current shortage in skilled traders at the moment that makes no commercial sense.
Tax Hacks is written by Mike Warburton, previously a tax director with accountants Grant Thornton, and is published twice a month on Tuesdays. You can email Mike on firstname.lastname@example.org