The Student Room Group

Income tax and personal allowance feeeze

If the personal allowance freeze continues for another 5 years, how muxh extra tax would one pay if earning 95k per annum vs if the PA freeze did not exist.
Original post by sultangopi
If the personal allowance freeze continues for another 5 years, how muxh extra tax would one pay if earning 95k per annum vs if the PA freeze did not exist.

To answer that question you'd need to know by how much the personal allowance would have increased had it not been frozen. However, there is no way to know that as it doesn't increase by a predictable amount each year.

For example, for 2019/20 it was £12,500, and wasn't changed for 2020/21. Then for 2021/22 it was increased by just £70 to £12,570 - a figure at which it remained for 2022/23. So it's only increased by £70 over the last four years anyway.

For someone earning £95,000 that £70 increase in the personal allowance would have saved them £28 in income tax per year.
Original post by DataVenia
To answer that question you'd need to know by how much the personal allowance would have increased had it not been frozen. However, there is no way to know that as it doesn't increase by a predictable amount each year.

For example, for 2019/20 it was £12,500, and wasn't changed for 2020/21. Then for 2021/22 it was increased by just £70 to £12,570 - a figure at which it remained for 2022/23. So it's only increased by £70 over the last four years anyway.

For someone earning £95,000 that £70 increase in the personal allowance would have saved them £28 in income tax per year.


Thanks, what do you make of following

https://www.thesun.co.uk/money/14230075/income-tax-freeze-affect-wages/amp/

I know it is sun but they seemed to say around 3k worse off?
Reply 3
Original post by sultangopi
If the personal allowance freeze continues for another 5 years, how muxh extra tax would one pay if earning 95k per annum vs if the PA freeze did not exist.


The same as someone earning £20k, £50k, £85k, £195k or £9.5m.
(edited 1 year ago)
Original post by Quady
The same as someone earning £20k, £50k, £85k, £195k or £9.5m.

Nope
Reply 5
Original post by sultangopi
Nope


Interesting.

Is this hypothetical person really bad at tax planning?
Original post by sultangopi
Thanks, what do you make of following

https://www.thesun.co.uk/money/14230075/income-tax-freeze-affect-wages/amp/

I know it is sun but they seemed to say around 3k worse off?

That article, from March 2021, says that the personal allowance "usually rises in line with the Consumer Price Index (CPI) rate of inflation to keep up with increasing living costs."

I've not checked whether that's historically accurate (it certainly hasn't been the case for the last four years), but in order to estimate the financial impact of the difference between such a policy and a policy of freezing the personal allowance, one would need to accurately predict what inflation will do over each of the next five years.

Given the assumptions made by the chartered accountants who did the calculations on behalf of The Sun, I have no reason to suspect that their numbers were inaccurate.

However, they do demonstrate one important obstacle when it comes to this kind of analysis: nobody can predict the future. The estimates provided are "based on the assumption that CPI continues to stay at 0.5%". That assumption seems laughable now.
Original post by DataVenia
That article, from March 2021, says that the personal allowance "usually rises in line with the Consumer Price Index (CPI) rate of inflation to keep up with increasing living costs."

I've not checked whether that's historically accurate (it certainly hasn't been the case for the last four years), but in order to estimate the financial impact of the difference between such a policy and a policy of freezing the personal allowance, one would need to accurately predict what inflation will do over each of the next five years.

Given the assumptions made by the chartered accountants who did the calculations on behalf of The Sun, I have no reason to suspect that their numbers were inaccurate.

However, they do demonstrate one important obstacle when it comes to this kind of analysis: nobody can predict the future. The estimates provided are "based on the assumption that CPI continues to stay at 0.5%". That assumption seems laughable now.


good points. I guess if someone stayed on exact same salary for next 5 years though they would simply keep paying same tax as they are doing now as the PA freeze already in place.

I wonder which types of earners get hit most by Jeremy Hunt freezing PA for the forseeable future.
Reply 8
Original post by sultangopi
good points. I guess if someone stayed on exact same salary for next 5 years though they would simply keep paying same tax as they are doing now as the PA freeze already in place.

I wonder which types of earners get hit most by Jeremy Hunt freezing PA for the forseeable future.


Those in Scotland earning between £43k and £100k through PAYE who do no tax planning.
Original post by DataVenia
That article, from March 2021, says that the personal allowance "usually rises in line with the Consumer Price Index (CPI) rate of inflation to keep up with increasing living costs."

I've not checked whether that's historically accurate (it certainly hasn't been the case for the last four years), but in order to estimate the financial impact of the difference between such a policy and a policy of freezing the personal allowance, one would need to accurately predict what inflation will do over each of the next five years.

Given the assumptions made by the chartered accountants who did the calculations on behalf of The Sun, I have no reason to suspect that their numbers were inaccurate.

However, they do demonstrate one important obstacle when it comes to this kind of analysis: nobody can predict the future. The estimates provided are "based on the assumption that CPI continues to stay at 0.5%". That assumption seems laughable now.


Bbc seem to be saying £670 extra?
https://www.bbc.co.uk/news/business-63675313
(edited 1 year ago)
Original post by sultangopi
Bbc seem to be saying £670 extra?
https://www.bbc.co.uk/news/business-63675313

Your original question was "If the personal allowance freeze continues for another 5 years, how muxh extra tax would one pay if earning 95k per annum vs if the PA freeze did not exist." The caption on that BBC chart is "How threshold freezes and reductions will affect most taxpayers by 2023-24". Somebody earning £95,000 before tax is impacted by the personal allowance (£12,570 right now) and the threshold at which they begin to pay higher rate tax (£50,271 right now)". As your question referred only to "personal allowance", that's the only factor I considered.

Also, as I pointed out in post #4, this type of analysis requires assumptions about what would have happened had a freeze not been imposed, and if that assumption was that the personal allowance (and higher rate tax threshold, which you've now brought into the conversation) would have otherwise risen in line with inflation, one has to make an assumption as to what the rate of inflation will be in the future (your post refers to "another 5 years"). As I stated in post #2, the personal allowance had only increased by £70 since 2019/20 anyway. Over that same time period the threshold at which higher rate tax became payable increased by just £200.

I can see no detail in the BBC article about what assumptions that have made in this regard. The fact that the chart contains a footer of "Source: Ernst & Young" suggests that they haven't done the maths themselves anyway. If EY (who haven't been known as Ernst & Young for years) have published this same information on their own web site (with, importantly, the associated assumptions), then I can't find it. It's a shame the BBC didn't actually reference their source properly.

In summary: that chart isn't answering the question you asked and is using unspecified predictions about what would otherwise have happened; my figures answered the question you asked, relative to what's actually happened over the last four years. If you feel more comfortable with the £670 figure from the BBC (well, EY), then by all means use it.
Original post by DataVenia
Your original question was "If the personal allowance freeze continues for another 5 years, how muxh extra tax would one pay if earning 95k per annum vs if the PA freeze did not exist." The caption on that BBC chart is "How threshold freezes and reductions will affect most taxpayers by 2023-24". Somebody earning £95,000 before tax is impacted by the personal allowance (£12,570 right now) and the threshold at which they begin to pay higher rate tax (£50,271 right now)". As your question referred only to "personal allowance", that's the only factor I considered.

Also, as I pointed out in post #4, this type of analysis requires assumptions about what would have happened had a freeze not been imposed, and if that assumption was that the personal allowance (and higher rate tax threshold, which you've now brought into the conversation) would have otherwise risen in line with inflation, one has to make an assumption as to what the rate of inflation will be in the future (your post refers to "another 5 years"). As I stated in post #2, the personal allowance had only increased by £70 since 2019/20 anyway. Over that same time period the threshold at which higher rate tax became payable increased by just £200.

I can see no detail in the BBC article about what assumptions that have made in this regard. The fact that the chart contains a footer of "Source: Ernst & Young" suggests that they haven't done the maths themselves anyway. If EY (who haven't been known as Ernst & Young for years) have published this same information on their own web site (with, importantly, the associated assumptions), then I can't find it. It's a shame the BBC didn't actually reference their source properly.

In summary: that chart isn't answering the question you asked and is using unspecified predictions about what would otherwise have happened; my figures answered the question you asked, relative to what's actually happened over the last four years. If you feel more comfortable with the £670 figure from the BBC (well, EY), then by all means use it.


Your explanations make sense. I am just trying to work out how much extra tax a year someone on 95k would be making due to these issues
Reply 12
Original post by sultangopi
Your explanations make sense. I am just trying to work out how much extra tax a year someone on 95k would be making due to these issues


Someone inside IR35?
Original post by sultangopi
Your explanations make sense. I am just trying to work out how much extra tax a year someone on 95k would be making due to these issues

I understand that. I'm just pointing out that it's a hard question to answer, as there are so many unknowns.

Someone earning £95,000 will pay exactly the same amount of tax this year as next - because none of the relevant allowances or thresholds are changing. They'll only pay more tax next year than they did this year if their salary increases - and they would have paid that same additional tax this year if their salary had increased this year too.
Original post by DataVenia
I understand that. I'm just pointing out that it's a hard question to answer, as there are so many unknowns.

Someone earning £95,000 will pay exactly the same amount of tax this year as next - because none of the relevant allowances or thresholds are changing. They'll only pay more tax next year than they did this year if their salary increases - and they would have paid that same additional tax this year if their salary had increased this year too.


That all is clear to be fair and you are right about payinh extra on any salary increases.

Why is it that people are saying we are going to be paying much more tax due to recent autumn statement?

Is it simply due to inflation as money is worth less?
Original post by sultangopi
That all is clear to be fair and you are right about payinh extra on any salary increases.

Why is it that people are saying we are going to be paying much more tax due to recent autumn statement?

Is it simply due to inflation as money is worth less?

It's primarily because the print and broadcast media sell more newspapers and get more viewers if they have something dramatic so say. So they say something dramatic.

You're never going to see a newspaper headline which says: "Tax allowances and thresholds fozen: most people won't notice". No-one's interested in that story.

Don't get me wrong - people do genuinely have a lot to worry about, financially. Inflation. Energy costs. Corporation tax (which impacts many small business owners). Those issues dwarf the impact of a freeze in the personal allowance.
Original post by sultangopi
Why is it that people are saying we are going to be paying much more tax due to recent autumn statement?

It depends how you interpret the "we" in that sentence.

Taken across the whole population, more tax will be paid. That doesn't mean that everyone will be paying more tax.
Original post by DataVenia
It's primarily because the print and broadcast media sell more newspapers and get more viewers if they have something dramatic so say. So they say something dramatic.

You're never going to see a newspaper headline which says: "Tax allowances and thresholds fozen: most people won't notice". No-one's interested in that story.

Don't get me wrong - people do genuinely have a lot to worry about, financially. Inflation. Energy costs. Corporation tax (which impacts many small business owners). Those issues dwarf the impact of a freeze in the personal allowance.

Would be interested to hear your views

Sky news have the following:

https://news.sky.com/story/ed-conway-middle-earners-facing-same-tax-hit-as-those-on-six-figures-as-autumn-statement-starts-to-unravel-12750496

The Resolution Foundation provided a stark illustration of the issue here: If you earn £62,000 you'll end up paying an extra £1,600 in taxes.

The same goes for someone earning £124,000 - they pay an extra £1,600.



Any accuracy to these numbers?
Original post by martin7
It depends how you interpret the "we" in that sentence.

Taken across the whole population, more tax will be paid. That doesn't mean that everyone will be paying more tax.


I guess anyone is paying more tax though if you get a wage increase, e.g. 55k to 60k but tax % stays the same (40%)
Original post by sultangopi
Would be interested to hear your views

Sky news have the following:

https://news.sky.com/story/ed-conway-middle-earners-facing-same-tax-hit-as-those-on-six-figures-as-autumn-statement-starts-to-unravel-12750496

The Resolution Foundation provided a stark illustration of the issue here: If you earn £62,000 you'll end up paying an extra £1,600 in taxes.

The same goes for someone earning £124,000 - they pay an extra £1,600.



Any accuracy to these numbers?


maybe just headline claims but no real substance

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