Millions of self-employed workers will pay higher tax rates as a result of ‘fiscal drag’
Government stealth taxes will see millions more workers dragged into paying the higher rate of income tax by 2025 – a further financial hit for the nation’s flexible workforce at an already challenging time.
The news, as reported by The Times, is a result of the tax rate freezes put in place by Rishi Sunak during his time as Chancellor in 2021 and is detailed in an economic forecast from the Office of Budget Responsibility (OBR).
The threshold freezes, recently extended until 2028, will see more taxpayers subject to higher taxes over time, as a result of ‘fiscal drag’.
In total, the move will generate an additional £42.9bn in revenue by 2028 – a comprehensive raid that has been labelled “shocking” and a “stealth tax” by a Treasury spokeswoman.
The financial impact of fiscal drag
In its forecast, the OBR states that “virtually all the main allowances and thresholds” for income tax and national insurance are “frozen, rather than indexed to inflation”.
If indexed to inflation, the tax-free personal allowance would have increased to £16,200 by 2027; instead, it is fixed at £12,570. Similarly, the higher rate threshold would have increased to £65,100 from its current rate of £50,270.
This results in fiscal drag. With rates fixed at their current levels, more workers are dragged over tax thresholds as inflation drives up their earnings. The effect is particularly pronounced for lower earners; the OBR estimates an additional 4m people will be pushed over the tax-free personal allowance. Many self-employed workers will also be part of this group.
There were 3.8m higher rate taxpayers in 2019. Following the freeze in 2021, there are 6m taxpayers in this band, and this is projected to increase to 6.4m in 2024.
The highest rate of income tax – the additional rate, charged at 45% on earnings over £150,000 – is currently paid by 1.2m workers; almost half a million more workers will be dragged into paying this rate in 2024.
Challenging climate for contractors and self-employed
The publication of the OBR forecast comes at a challenging time for the self-employed. It notes that “frozen thresholds are the largest contributor” to the UK’s “rising overall economy-wide tax burden”, which is currently at its highest level in 75 years, at around 37% of national income.
The UK’s business tax landscape has become more aggressive in recent years, which – alongside legislative reforms – has dented confidence and reduced the financial incentives of self-employment.
As well as paying more in income tax as a result of these threshold freezes, limited company contractors face higher taxes across the board, including a higher rate of Corporation Tax, and a lower tax-free dividend allowance.
The introduction of IR35 reform has also been severely damaging, with some contractors abandoning self-employment altogether as a result.
The Autumn Budget in November was an opportunity for the Chancellor to put forward some measures to support the self-employed, and it did offer some positive developments, including the end of double taxation under IR35 and reduced National Insurance rates.
Workers “bitterly betrayed” by government
Speaking to the Times, Sarah Olney, the Liberal Democrat Treasury spokeswoman, said workers had been “bitterly betrayed” as a result of the threshold freezes, leaving them facing a “stealth tax in the middle of a cost of living crisis”.
Olney also suggested the self-employed have faced “years of unfair tax rises”, with “record numbers of people” paying higher rates of income tax, alongside higher business taxes across the board.
Isaac Delestre, a research economist from the Institute for Fiscal Studies, admitted that “freezing thresholds is a perfectly valid way to raise” tax revenues, but questioned “whether it is a sensible policy” due to “much uncertainty over its impact”.
I cannot see this as a self employed issue, it is all taxpayers