Households are being warned that recent tax cuts could be “slowly eliminated” due to Chancellor Jeremy Hunt’s freeze on allowances, experts have warned.
In his Autumn Statement last year, Mr Hunt confirmed the National Insurance rate would be reduced from 12 to 10 per cent, affecting millions of employees from January.
However, analysts have been warning the move has been undercut by fiscal drag, the term used to describe when taxpayers are dragged into higher tax brackets due to wages rising while allowances remain the same.
During 2022 Autumn Statement, the Chancellor extended the ongoing freeze to tax allowance thresholds until 2028.
Jeremy Hunt is under fire for his tax allowance freeze
Despite politicians floating further tax cuts before this year’s General Election, experts are urging the Government to consider raising tax thresholds so people will benefit from any cuts.
One of the recommendations being suggested is adjusting tax allowances every year to take inflation into account.
Speaking to GB News, Chris Demetriou, an accountant and the founder of Archimedia Accountants, described this proposal as a “reasonable approach”.
He said: “In my view, tax thresholds definitely need to be adjusted for inflation annually to prevent this.”
He explained: “A reasonable approach would be to automatically index thresholds to average wage growth each year. This ensures fiscal drag doesn’t slowly eliminate the value of tax cuts that aim to boost incomes and spending.
“Failing to account for inflation essentially raises taxes in ‘stealth mode’ through bracket creep. Individuals may not notice until their entire tax cut has vanished.
“A lack of adjustment ignores the real-world impact of a steadily falling tax-free allowance over the years.”
According to interactive investor, fiscal drag is expected to cost taxpayers up to £4,000 by 2027 if changes are not made.
The accountant encouraged Jeremy Hunt to introduce regular reviews of tax allowances to ensure those most in need reap the awards of any future tax cuts.
Mr Demetriou added: “Regular threshold uprating is necessary to make sure people get to actually benefit from tax reductions, rather than seeing rising prices erase any gains.
“It’s the fair thing for policymakers to do if their goal is to leave more money in people’s pockets in the long run.”