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How much would higher income tax thresholds save you?

Chancellor Jeremy Hunt
Tax cuts are widely believed to be Jeremy Hunt's best chance at turning Tory fortunes - Paul Grover

Staring down a general election, the Conservatives find themselves far behind Labour in the polls. Tax cuts in the Budget are widely believed to be their best chance at salvation – despite there being little fiscal headroom to do so.

The Conservatives may be banking on January’s National Insurance main rate reduction from 12pc to 10pc – worth £1,000 in annual savings according to the Government – as well as a rumoured further cut to 9pc in the Budget. But these savings pale in comparison to the cost of frozen income tax thresholds to Britons’ finances.

Designed to be uprated every year in line with inflation, in 2021 then chancellor Rishi Sunak announced they would instead remain fixed for four years.

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In the wake of Kwasi Kwarteng’s fiscally calamitous 2022 “mini-Budget”, his successor Jeremy Hunt extended the freeze to 2027/28. The stealth tax this imposes creates “fiscal drag”: growing wages over fixed thresholds means that ever more people are dragged into paying higher rates.

For someone on an annual salary of £70,000, pushing the 40pc rate up from £50,270 to £60,000 would save just under £2,000 in income tax. And raising the personal allowance from £12,570 to £15,000 would save a further £500.

Get a taste of what changing the thresholds and personal allowance could mean for you by playing chancellor yourself with our new tool.

For a person on the estimated 2024 median full-time wage of £37,000, for example, raising the personal allowance to £20,000 would yield just under £1,500 in savings.

A word of warning to very high earners: increasing the personal allowance when your income is above the additional rate threshold of £125,140 will actually leave you paying more tax. This is because the allowance vanishes at that point, and you are left paying 40pc on a larger share of your initial earnings.

Last week, the Telegraph revealed that Reform UK would raise the personal allowance to £20,000 and the 40pc rate to £70,000 if they were in power. For a person making £100,000 a year, these changes would save them just under £5,400 a year.

Threshold freezes are great for the Treasury and the Government alike. Without having to push through perennially unpopular tax rate hikes, they bring in billions of additional revenue by stealth. The Office for Budget Responsibility (OBR) forecasts that relative to uprating tax bands by the CPI, this policy will have raised just under £43bn by 2027/28.

By this time, they expect an extra 4m workers will be dragged into the basic rate band, three million into the higher rate band and 400,000 into the additional rate.