The government may not have announced any headline increases to personal tax rates in the Autumn Statement or Spring Budget (though it did reduce some main reliefs and exemptions), but the raft of tax thresholds frozen until 2028 means that many taxpayers will find themselves paying more tax through fiscal drag.

High levels of wage inflation have persisted over the last year, both as a result of the war for talent, and to assist with the cost-of-living crisis. Over the longer term, asset values – housing in particular – have experienced sustained growth. But tax thresholds have not kept pace. 

Quite the opposite. The government has recently frozen multiple thresholds until at least 2028. Some of these thresholds had not been updated in many years. Together, this leads to a steadily increasing tax burden on UK taxpayers, and more UK taxpayers becoming subject to some form of tax.

With this comes associated complexity. More individuals are becoming part of the self assessment system or having to engage with HMRC administration. This piles more pressure on an already burdened HMRC system that is struggling to cope. 

Choosing to raise more tax by freezing thresholds not only increases tax revenue by stealth, it often undermines the original objective of tax policies. Where rates and thresholds are not set in relation to a specific demographic, they may fail to properly target the tax that should be levied or the relief that should be received. 

I take a more detailed look at some of the impacts of the freezes below.

Personal allowance

Let’s start with one of the broadest allowances. The income personal allowance is normally uprated annually in line with the September consumer price index (CPI) figure. However, the allowance was frozen as part of the Spring Budget 2021, due to stay at its 2021 level until 2026. The most recent Autumn Statement took this a step further, freezing its level until 2028.

For most, this will factor into a slightly higher tax liability across their sources of income. However, those on the lower end of the income scale, whose income has previously been covered by the personal allowance, will be more significantly affected.

For instance, it intersects messily with the decision to uphold the state pension triple lock, which will boost the full state pension payments by 10.1% in 2023/24 to c£10,600 per year. Pensioners with the state pension and only a small amount of other income may find themselves breaching the personal allowance for the first time. This means that they may have a tax liability to pay, as PAYE is not collected on the state pension. Broadly this will be dealt with via a simple assessment, a bill calculated and issued by HMRC. Thankfully, therefore, most of these affected individuals will not have to grapple with the self assessment system. They will, nonetheless, have a potentially unexpected tax bill to budget for and pay.

A similar increase of 9.7% has been applied to national minimum wage (NMW) for 2023/24. Previously s57A, ITA 2007 linked the level of the personal allowance to the NMW for 21-year-olds once the personal allowance reached £12,500. This prevented a full-time worker (30 hours per week) on the NMW from being subject to income tax. However, this provision was repealed in 2019. In 2023/24, a similar full-time worker on NMW would earn £15,880. This clearly exceeds the frozen personal allowance and exposes some of their wages to income tax.

Couples who utilise the transferable marriage allowance may therefore want to check whether their eligibility is impacted by any increases in the lower earner’s income.

It shouldn’t be forgotten that the level at which the personal allowance starts to taper down is £100,000. Although this isn’t a threshold that is scheduled for an annual increase, it has stood at this level since 2010 and shows no signs of being uprated, reviewed or removed. This is particularly noticeable since the announcement at the Autumn Statement that the additional rate threshold will be reduced to £125,140 to coincide with the top end of the personal allowance taper. 

Those who perhaps receive a pay rise or who experience greater income returns on their investments in the next year will find a greater proportion of their income liable to tax, and falling into higher tax bands.

National insurance contributions

While the 2022/23 tax year saw a mixture of uplifts in thresholds and reductions in rates, the Autumn Statement confirmed that the national insurance contribution (NIC) thresholds will remain frozen at the 6 July 2022 levels until 2028. This means that the class 1 primary threshold, the class 2 lower profits threshold and the class 4 lower profits limit remain aligned with the £12,570 personal allowance.

The class 1 upper earnings limit and the class 4 upper profits limit remain aligned to the income tax higher rate threshold at £50,270 for these years.

Class 2 and 3 rates, however, will increase based on CPI.

This freeze solely affects workers, since investment income is not subject to NIC. 

A combination of inflation and competition to attract and retain workers has led to well publicised wage increases for (some) workers over the past months. For many this will mean that more of their earnings will fall above the primary threshold and be subject to NIC, leading to a proportionately larger tax burden on their income. 

There is the slight silver lining, though, in that the health and social care levy is no longer in play. Plus, the decision in the Spring Statement 2022 to align the primary threshold and lower profits limits with the personal allowance is a welcome simplification.

Inheritance tax

Inheritance tax (IHT) is often cited as an unpopular tax. Confirmation in the Autumn Statement that the nil rate band and residence nil rate band are frozen until 2028, means more estates are going to find themselves within its scope. However, even before the Autumn Statement, the nil rate band has effectively been frozen since 2009. 

Asset values have understandably grown substantially over the period. While the residence nil rate band (RNRB) has since been introduced to cover the value of some main family homes, climbing property values have also eroded the benefit of this relief. 

Aside from a slight dip in 2019/20 when the RNRB was fully phased in, HMRC has received steadily increasing revenues from IHT over the past 10 years as asset values have outstripped allowances. 

There is also the question of administration. Where there is IHT to pay on an estate, an IHT return must be submitted to HMRC, and tax payments commenced before probate can be applied for. There are excepted estates – estates that have a gross asset value of below the nil rate band – that do not have to submit an IHT return to HMRC. However, those estates that have assets that are fully covered by the RNRB or the transferable nil rate band, still need to make a return. This is even where no tax is due. 

The knock-on effect of these frozen allowances is that more executors and advisers will be submitting returns to HMRC, creating an additional step for bereaved families before applying for probate. There are IHT reliefs too, such as share loss relief, for which actions need to be completed by certain time limits following the date of death. Lengthy IHT and probate processes may mean executors struggle to make best use of these.

The back pages of the Budget Red Book mention proposals by HMRC to streamline reporting for estates without tax liabilities. This issue at least may improve with time. With IHT proving a thorny subject, a change in the thresholds or a wholesale review of the tax looks less likely in the short term.

High income child benefit charge

While this charge was not frozen as part of the Autumn Statement 2022, it still deserves a mention. It has now reached its tenth anniversary and the thresholds between which it applies have remained static. 

Initially imagined as a tax on high-earning parents, the high income child benefit charge (HICBC) has been plagued by issues since its introduction. Many have complained about its complexity and potential unfairness, or the lack of nuance in its operation. Parents may have found themselves in receipt of failure to notify penalties from HMRC for a charge that they were unaware of.

However, in the face of wage inflation, the failure to review HICBC thresholds means that the charge now applies to a far broader base of families than when it was first introduced. This will only increase in coming years. Again, this places a greater administrative burden on both taxpayers and HMRC, as greater numbers of self assessment tax returns will need to be filed to report and pay HICBC.

The frozen thresholds also mean that the scope of the tax is shifted further down the income scale, potentially capturing lower income families and basic rate taxpayers that were not the target of the policy. 

It is also worth noting another cliff edge for childcare. Both tax-free childcare and the 30 hours of free childcare are immediately withdrawn when one parent’s adjusted net income reaches £100,000. With the expansion of free childcare for working parents of children over nine months, parents may stand to lose an increasingly valuable benefit if their income exceeds this.

There are now multiple potholes in the tax landscape for parents to watch out for. Despite the aims of the Spring Budget to encourage employment, these issues may distort behaviour for workers with children. Parents may decide to make use of the increased annual allowance to make contributions to their pensions. On the other hand, they may decide to reduce their working hours to remain under the £100,000 threshold. 

A lack of timely review against policy objectives means that while the government wants to encourage people back into work, there are still tax barriers that may work against this goal. Frozen thresholds are only part of this.

Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW