Four-year Income Tax threshold freeze to begin

The four-year freeze on Income Tax thresholds began in April 2022, the Resolution Foundation said in its New Year outlook published on 31 December 2021¹. The think tank described the freeze as "a further tax rise, albeit one that does not result in a month-to-month loss of cash"¹.

The freeze sits alongside other April changes. National Insurance rates rose by 1.25 percentage points, described by the foundation as "a precursor to the proper Health and Social Care Levy which will exist from 2023"¹. The National Living Wage rose by 6.6 per cent and now applies to those aged 23 and over¹. Council Tax and dividend tax also rose¹.

The foundation estimated the combined effect of the National Insurance and Income Tax changes at £600 across all households on average, or 1.4 per cent of disposable income¹. It said the National Insurance rate rise alone, excluding the threshold effect, would lower average income for households in the bottom half of the distribution by around £140 (0.6 per cent), while those in the top half would lose £730 (1.2 per cent)¹.

Energy costs form the other half of the picture. The foundation said wholesale spot gas and electricity prices had risen more than eight-fold and five-fold respectively over the previous 12 months¹. It estimated the April energy price cap rise at around £500 or more for a typical household bill, "on top of October's £139 increase", plus an additional charge of around £100 as the costs of supplier failures are recouped¹. It said the poorest households would see energy spend rise from 8.5 to 12 per cent of their total household budget, three times the proportion for the richest¹.

The foundation also set out its view of pay. It said earnings growth fell to 3.8 per cent in October, "just as CPIH inflation rose to the same level", meaning real wages were flat over the previous year¹. It projected growth of just 0.1 per cent in the year to Q4 2022, and said that by the end of 2024 average earnings are set to be £740 a year lower than they would have been had pre-pandemic wage growth continued¹.

Why it matters for households

A threshold freeze does not change the rate of tax charged. It holds the level at which each rate starts, so as wages rise more of a person's pay falls into higher bands and the tax bill grows over time. The foundation's estimate of the combined National Insurance and Income Tax effect is £600 per household on average, with the National Insurance element weighted towards higher earners¹.

The energy and tax changes land together in the same month. The foundation put the combined overnight rise in taxes and energy bills at an average of £1,200 a year per household in April¹. It said the April cap increase would affect more households than past changes because fixed tariffs were largely absent in the second half of 2021, and because customers moved from failed suppliers were shifted from fixed deals onto standard tariffs, citing Avro Energy, where 85 per cent of 580,000 customers were on fixed deals¹.

Lower earners have some protection from the 6.6 per cent National Living Wage uprating, which now covers those aged 23 and over¹. The foundation said the energy cost rise is regressive in its effect on budgets, with the poorest households spending 12 per cent of their budget on energy against 8.5 per cent before¹.

What happens next

The Health and Social Care Levy, which the foundation describes as the "proper" version of the National Insurance rise, takes effect from 2023¹. The Income Tax threshold freeze runs for four years from April 2022¹. The foundation said it was "hard to believe that steps to mitigate it won't be taken" given the scale of the April increase, and noted that the Government's stated intention at the time was for the tax and energy rises to proceed¹. It listed options under discussion including reducing the size of the energy cap rise, temporarily removing VAT on electricity bills, moving environmental and social levies into general taxation, and extending the period over which supplier failure costs are recouped¹. No decision on mitigation had been reported at the time of publication¹.