A stealth increase in income tax is expected to raise an extra £71billion for the Treasury by 2030-31, according to economists.
Nearly seven million more people will pay income tax than would have done if thresholds had continued to rise with inflation after the freeze was introduced five years ago.
A further six million taxpayers are expected to be pushed into the higher and additional-rate bands as a result of the policy, analysis shared with the Daily Mail found.
Income tax thresholds have been frozen since 2021-22, and former Chancellor Rachel Reeves announced last year that the freeze would remain in place until 2030-31.
As wages rise, the policy means more people are paying income tax, while existing taxpayers can face larger bills on their earnings.
Although Prime Minister Andy Burnham had previously indicated that the issue could be reviewed, Chancellor John Healey left the freeze unchanged in Wednesday’s Budget.
An analysis of Office for Budget Responsibility (OBR) figures by the Institute for Fiscal Studies (IFS) estimates that the measure will generate an additional £71billion in tax revenue.
The IFS said yesterday: ‘Compared with thresholds rising in line with inflation from 2021-22, the OBR forecast shows that by 2030-31 an additional 6.75million people will be paying income tax because of the freezes. A further 6.03million will be brought into the higher and additional rates, generating an extra £71billion in tax revenue.’
Chancellor John Healey left the tax threshold freeze unchanged in his latest Budget, despite earlier suggestions that the policy might be reconsidered
Labour was accused on Friday of ‘hiking taxes by stealth’. Tory Treasury spokesman Gareth Davies said: ‘Labour is making as many people as possible pay as much tax as possible, even as families face rising costs at the checkout and soaring energy bills.
‘The Government would rather squeeze working people dry than reduce the ballooning welfare bill that funds the lifestyles of people who choose not to work.
‘Labour’s claims about providing “breathing space” are simply smoke and mirrors. In reality, it is hiking taxes by stealth and pushing the tax burden to a record high.’
Mr Davies added: ‘The Conservatives are the only party that will cut the welfare bill and reduce taxes, support hard work and aspiration, and allow people to keep more of what they earn.’
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Treasury sources said the Government was raising money in a ‘targeted way’, rather than increasing the main taxes charged on people’s earnings.
The freezing of tax thresholds creates what is known as ‘fiscal drag’—a process in which pay rises pull people into higher tax bands.
Before 2021, income tax thresholds were generally increased each year in line with inflation. In that year’s Budget, then-Chancellor Rishi Sunak announced that they would be frozen from April 2022 until 2026.
Successive governments have since extended the freeze. While Mr Healey did not refer to it in his Budget, accompanying documents confirm that it will continue until 2031.
Every taxpayer receives a personal allowance of £12,570, meaning income below that level is not taxed. Earnings from £12,571 to £50,270 are taxed at the basic rate of 20 per cent.
Income between £50,271 and £125,140 is subject to the higher rate of 40 per cent, while earnings above £125,140 are taxed at the additional rate of 45 per cent.
Savings and property income can also be subject to additional charges.
The OBR said that had the personal allowance increased in line with inflation since 2021 and until 2030-31, it would be £4,900 higher – with the threshold for the higher rate to kick in £20,100 higher.
It added that the freezes mean the proportion of taxpayers paying either higher or additional rate tax will have increased from 15 per cent in 2021-22 to 24 per cent in 2030-31.
The freezing of tax thresholds affects lower and middle earners the most, with the impact for a basic rate taxpayer the equivalent of a 4 per cent tax increase.
Between 2021 and next year, basic rate taxpayers will have paid £700 more in tax than if thresholds had gone up in line with inflation, analysis by AJ Bell suggests. By the time the freeze ends in 2031, that figure will have risen to around £960.
The situation is even worse for the higher rate taxpayers, who will have paid as much as £3,500 in extra tax by next year.