In the 2021 Budget the then chancellor, Rishi Sunak, froze the personal allowance and higher rate income tax thresholds from 2021-22 until 2025-26[1]. This freeze was extended to 2027-28 and the additional rate threshold cut from £150,000 to £125,140 in 2023-24 by Jeremy Hunt in the 2022 Autumn Statement.[2]
These policies result in fiscal drag, where taxpayers begin paying tax, or pay tax at a higher rate, as their incomes rise and nominal tax thresholds stay the same. This means people pay more tax and the government receives additional tax revenues, as has occurred with this freeze. Total income tax receipts are forecast to have risen from £195.3 billion in 2020-21, the last financial year before the freeze, to £277.2 billion in 2023-24.[3] By the time this freeze is set to end, in 2027-28, income tax revenues are forecast to have risen to £346.2 billion,[4] almost £151 billion more than before the freeze was implemented. It is expected that £40 billion of this increase is a result of the freeze on personal tax thresholds and inflation.[5]
The impact of freezing income tax thresholds has been particularly harmful as average weekly regular earnings have risen by 15 per cent since April 2021,[6] causing more people to fall into the basic and higher rates of income tax. At the same time, bills have risen for food, energy, mortgages, rent and other essentials placing further pressures on individuals alongside the record tax burden they currently experience. In March, the chancellor must set out a plan to reduce this burden by unfreezing income tax thresholds or cutting the basic rate. This briefing note examines the number of individuals in each UK region set to have paid income tax in 2023-24 compared with 2021-22.
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Key findings
- Almost 1.1 million more people will have paid the basic rate of income tax in 2023-24 than in 2021-22, while more than another million will have paid the higher rate.
- Including other rates, in 2023-24 almost 2.5 million more people are forecast to be paying income tax than in 2021-22 when thresholds were frozen.
- The North East, Yorkshire and the Humber and Wales are set to be the UK regions with the largest percentage increases in the total number of people paying income tax. These are the three regions which also have the lowest average earnings in the UK.[7]
- Since 2021-22, the North East will have had the largest percentage increase in basic rate taxpayers at more than six per cent or 70,000 people. Wales will have had the largest percentage increase in higher rate taxpayers at over 36 per cent or 46,000 people.
- In 2023-24, the North East, Wales and the West Midlands will have seen a 100 per cent increase in the number of people paying the additional rate since 2021-22.
- The South East will see the largest increase in total income tax payers, with an additional 110,000 and 159,000 people alone paying the basic and higher rate respectively.
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[1] HM Treasury, Budget 2021, March 2021, p. 52.
[2] HM Treasury, Autumn Statement 2022, November 2022, pp. 49-50.
[3] Office for Budget Responsibility, Public finances databank – January 2024, 22 January 2024, obr.uk/download/public-finances-databank-january-2024/?tmstv=1706709484, (accessed 31 January 2024).
[4] Ibid.
[5] Resolution Foundation, Britain’s record tax rise on incomes is set to raise £40 billion a year by the middle of the next Parliament, 6 October 2023, www.resolutionfoundation.org/press-releases/britains-biggest-tax-rise-on-record-is-set-to-raise-40-billion-a-year-by-the-middle-of-the-next-parliament/, (accessed 31 January 2024).
[6] Office for National Statistics, EARN01: Average weekly earnings, 16 January 2024, www.ons.gov.uk/file?uri=/employmentandlabourmarket/peopleinwork/earningsandworkinghours/datasets/averageweeklyearningsearn01/current/earn01jan2024.xls, (accessed 31 January 2024).
[7] Francies-Devine, B., Average earnings by age and region, House of Commons Library, 18 December 2023, commonslibrary.parliament.uk/research-briefings/cbp-8456/, (accessed 1 February 2024).