What would the perfect tax rise look like, from the Treasury’s point of view? Ideally, it would raise stupendous amounts of money, without anyone actually noticing that they’d become poorer. In the Chancellor’s wildest dreams, she might even be able to argue that it wasn’t a tax rise at all.
Well, luckily for the Treasury – but unluckily for the rest of us – such a tax rise exists. It’s called freezing the tax thresholds. Rishi Sunak started doing it in 2021. Rachel Reeves, on taking power, promised she’d stop doing it in 2028. But now that she’s desperate for cash, ministers are hinting very heavily that they’re going to start doing it again.
At the moment, you start paying income tax when you earn £12,571. You pay 20 per cent on anything up to £50,270, then 40 per cent on what you earn between £50,271 and £125,140, then 45 per cent on anything above that.
If you’re thinking those numbers look a bit weird, you’re right. That’s because traditionally, the thresholds have been increased with inflation. Freezing them stops that happening. Meaning that more people get dragged into paying higher rates of tax, and more of their income is taxed at a higher rate.
In essence, it’s a tax on pay rises – as is the accompanying freeze on National Insurance thresholds that Sunak also introduced. And it’s a very lucrative one. Already, 3.3 million extra people are paying higher rates of tax thanks to Sunak’s freeze. By 2030, it could be 4.1 million – by which point the threshold freeze will be handing the Treasury an extra £50 billion a year.
Some people will say: so what? Isn’t £50k a pretty decent salary anyway?
Well, £50k isn’t what it used to be. Especially in London, where the full-time median wage was about £44,000 in 2024 – meaning that we only need a few more years of pay rises before the average worker is paying a rate of tax originally intended for only the truly wealthy.
If you’re on £50k in London, the taxman could be taking more than half of every extra pound you earn.
It’s also worth mentioning that income tax is only one way the Treasury gouges you. If you’re earning over £50,271, you’ll be paying 40% income tax and 2% National Insurance on anything above that. But if you are a graduate – as huge numbers of people in London are – you are probably also paying 9% on your student loan. Which means the taxman is taking more than half of every extra pound you earn.
Earn between £100,000 and £125,140 – again, not a huge salary in the capital – and you lose the personal allowance, equivalent to a marginal tax rate of 60% (62% if you include National Insurance). Add on the student loan and it’s up to 71%.
It gets even worse if want a family. Between £60,000 and £80,000, child benefit gets withdrawn at a variable rate, depending on how many children you have. But perhaps the worst effect is losing all access to state-funded childcare once anyone in the family earns more than £100,000. Given the costs of childcare, a parent with two children under four would need to earn about £145,000 to get back to the same financial position.
There’s also another, hidden tax on workers: employer’s National Insurance. This is a 15% tax on wages paid by employers. Economists generally agree, however, that the burden of this tax mainly falls on workers. In other words, someone on over £125,000 looks as though they are paying 45% tax and 2% National Insurance. But when you take into account Employer’s National Insurance, over half of the cost of employing that person is paid in tax.
All of this is desperately unfair for hard-working families. But it’s also really bad for Britain. Our entire economy – and our ability to pay for public services – depends on people keeping the rewards of their effort. If you take a risk on a new job, seek a promotion, or take on extra hours, it should always make you better off. But higher marginal rates mean people often choose not work more.
This affects all of us: those people will ultimately pay less tax than they would otherwise. The economy produces less. Ultimately, the ability to fund services for the vulnerable in our society depends on everyone, but especially those on higher incomes, working hard and paying taxes. Which they’ll only do if they can keep enough of their money.
For the Treasury, freezing thresholds seems like a painless way to increase taxes. But it not only hammers millions of Londoners, but increasingly sends them a simple message: work doesn’t pay.
Daniel Herring is Head of Economics at the Centre for Policy Studies
