Budget 2020: Rishi Sunak reveals income tax changes
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New Prime Minister Rishi Sunak and Chancellor Jeremy Hunt are scheduled to set out a bold economic vision on November 17. Many are worried about what the announcements could mean for them, particularly given the challenging economic circumstances.
One policy which already exists is a freeze to income tax thresholds, up to and including the 2025/26 tax year which was first announced by then-Chancellor Rishi Sunak.
New calculations have illustrated the stark impact this policy could have on Britons with wages growing.
If wage growth is on average five percent per year for the next five years, but tax thresholds remain frozen, then someone earning £35,000 today will be £695 worse off by 2028/29 – and £2,016 poorer cumulatively over the five year period.
Similarly, a person earning £50,000 today will be £3,403 worse off in the 2028/29 tax year, and £9,765 poorer over the five-year period.
The stark data was compiled by Quilter, which warned the policy could have substantial effects on Britons.
Over the past 20 years, average wage growth annually has been close to three percent.
But with inflation continuing to soar, it is expected wage growth will be higher in the coming years.
Shaun Moore, tax and financial planning expert at Quilter, said: “These calculations illustrate the power of fiscal drag and how freezing income tax thresholds is a form of stealth tax.
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“Ultimately, if thresholds remain frozen for a number of years, then you will end up paying considerably more tax.
“Thresholds at present are meant to remain frozen until 2026.
“But with the cost of living crisis weighing heavy on Government spending, this could be extended.”
The expert highlighted it is likely Mr Sunak and Mr Hunt will work together to tighten the belts of the Government.
Upon entering his position as Chancellor under Liz Truss, Mr Hunt made the radical decision to U-turn on almost all of the tax policies announced in the short-lived mini-Budget.
Mr Sunak has been vocal about opposing the low tax policies floated by Liz Truss when the pair ran for the Tory leadership earlier this year.
Mr Moore said this could provide clues about the future economic direction of the country.
He added: “It is unlikely we will see these frozen thresholds thaw any time soon.”
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However, Britons do not have to remain totally powerless in the situation, according to the expert.
In fact, there are some measures people may wish to consider in becoming more tax-efficient.
Mr Moore added: “The new tax-year presents no better time to plan for efficient use of allowances for the tax-year ahead.
“If you are unsure about where to start, a financial adviser can help you identify how to make better use of the tax allowances available to you.
“While April may feel like a long time off it is worth starting to think about this sooner rather than later.”
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