The UK Treasury and HMRC have generated a massive £12.41 billion windfall through a 'stealth tax' mechanism, pulling an estimated 520,000 additional taxpayers into the higher 40p income tax band last year.
The Mechanics of the Fiscal Drag
This financial phenomenon, known as fiscal drag, occurs when tax thresholds are frozen while wages increase. As salaries rise to combat inflation, more people are pulled into higher tax brackets without any official change to tax rates.
HMRC collected £154.18 billion in revenue during the six months from April to September this year, a substantial jump from the £141.77 billion gathered during the same period last year.
Expert Analysis and Political Implications
Rachael Griffin, a tax and financial planning expert at wealth management firm Quilter, stated that Pay As You Earn (PAYE) income tax and National Insurance contributions remain "artificially inflated" by the threshold freeze.
"This doesn't point to a roaring economy but a sign of a Treasury increasingly reliant on extracting more from the same taxpayers," she added.
With speculation growing about possible income tax changes in the autumn Budget, experts suggest the government might be tempted to extend the freeze beyond its current 2028 deadline.
Sarah Coles from investment platform Hargreaves Lansdown noted: "The fact that this freeze is in place until 2028 means it's not over yet. There's every chance the thresholds could be frozen for longer, as this stealth tax fits within the Government's promise not to leave working people worse off, because it's a tax on pay rises."
The Future of Tax Policy
The situation presents a political dilemma for Chancellor Rachel Reeves. While reversing the freeze was positioned as a potential signature move in her first Budget, maintaining it would quietly preserve billions in extra tax revenue.
The freeze has proven to be an incredible money-spinner for the Treasury, raising questions about how long the government can resist this dependable source of income despite the political awkwardness it creates.
