Andy Burnham has indicated that a forthcoming HMRC income tax initiative could result in individuals earning around £35,000 being £500 worse off. The Labour Party government has already frozen income tax thresholds until 2031, a move that experts say will increase tax burdens through “fiscal drag.”
Fiscal drag occurs when tax thresholds remain fixed while wages rise with inflation, causing more income to be taxed at higher rates without any official rate increase. This means that earnings that would otherwise remain untaxed gradually get pushed into taxable bands, effectively increasing one’s tax liability. For those earning £35,000, this stealth tax effect could reduce disposable income by up to £500 by decade’s end.
Lord O’Neill, former Treasury Minister and potential chief economic adviser to Labour’s prospective Prime Minister, revealed that Burnham is seriously exploring partial income tax devolution across Britain. Devolution is a central theme for Burnham and is currently under active consideration.
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According to Nimesh Shah of the accountancy firm Blick Rothenberg, the future Prime Minister needs some “quick wins” within the existing tax system to generate revenue. Shah remarked, “This is one of the biggest tax raisers available. It’s an effective way for the government to increase tax revenue without drawing overt attention.”
Financial services firm Rathbones notes that while headline income tax rates are unlikely to rise, adjustments to thresholds and allowances could push tax bills higher even if the stated rates remain unchanged. Frozen thresholds mean that inflation-driven salary increases translate into increased taxation, as more income is pushed into higher tax bands.
Burnham has acknowledged public concern regarding the frozen personal allowance and is proposing a review. Should policy changes materialize, they may help mitigate fiscal drag, potentially easing the tax burden for many by preventing pensions and salaries from nudging taxpayers into higher bands absent actual rate changes.
Nimesh Shah underscores the significance of these frozen thresholds, explaining their effect is equivalent to a 4% increase in the basic 20% income tax rate.
Despite these considerations, experts caution Burnham against relying on so-called stealth taxes. Lord O’Neill emphasized, “We can’t just keep avoiding the difficult choices by using back-door methods to raise taxes.”