Tax rise due to be £12.5bn bigger than expected amid inflation surge, says IFS

The tax impact of a freeze on income tax thresholds is set to be much bigger than was previously thought amid surging living costs, according to a think tank.

Tax thresholds often increase in line with inflation, but last year Chancellor Rishi Sunak announced a four-year freeze to income tax thresholds.

Based on inflation forecasts at the time, this was expected to represent an £8 billion tax rise, the Institute for Fiscal Studies (IFS) said.

Since then, inflation has surged.

Taking this into account, new analysis by researchers at IFS shows that the policy is now expected to mean a £20.5 billion tax rise.

This is on top of the 1.25 percentage point increase to national insurance scheduled to start from April, to help pay for the NHS, health and social care in the UK.

Tom Waters, a senior research economist at IFS, said: “Usually tax thresholds go up in line with inflation.

“Last March, when the Chancellor announced a four-year freeze in income tax thresholds, inflation was fairly low and so he expected it to raise about £8 billion per year.

“Since then inflation has risen rapidly and is expected to rise even further, peaking at more than 8%.

“That means that the tax threshold freeze is now on track to be a £20.5 billion tax hike – two-and-a-half times what was originally expected.

“And this comes on top of the £13 billion increase in national insurance contributions slated for next month.

“This episode highlights the danger with setting tax thresholds in nominal terms for long periods of time – unexpected changes in inflation can make the size of a planned tax rise much bigger or smaller than expected.”