Unite, the UK’s second biggest union, has called for a reversal of the freezing of tax thresholds
Prime Minister Andy Burnham has been asked to change tax thresholds (Image: Getty)
Andy Burnham has been told to make a key change to ‘frozen’ tax thresholds which have left millions of the poorest workers paying more tax. Labour donating unions are set to meet Chancellor John Healey this evening (Thursday, September 17) to discuss the issue – before the Budget on October.
The thresholds dictate the amount individuals can earn before they are taxed and currently stand at £12,570 for the lowest 20 per cent rate, £50,270 for the higher 40 per cent rate, and £125,140 for the 45 per cent rate. Fiscal drag refers to an increase in tax revenue for the government without a direct rise in tax rates, caused by wages and prices increasing with inflation while tax brackets and allowances remain static.
With the lowest rate frozen at £12,570, millions of the lowest paid workers are paying more tax due to overall price increases. Unite, the UK’s second biggest union, has called for a reversal of the freezing of tax thresholds that see the lowest paid drawn into paying tax.
The union’s leader, Sharon Graham, said she told Andy Burnham that the cut to the winter fuel allowance, carried out under former Prime Minister Sir Keir Starmer, was a “disgrace”, adding: “What to you need to do is winter fuel in reverse – something that says to everyday people I am on your side.”
When he was elected, Mr Burnham said the freezing of tax thresholds had come up on the doorsteps when he was campaigning to return to Westminster as MP for Makerfield.
Tax thresholds have been frozen until 2031. By not uprating those rates in line with inflation, more lower paid people have paid tax for the first time and more better-off workers, including public service workers such as senior nurses, police officers and teachers, are now paying tax at the higher rate.
Ms Graham said: “We must see things happen immediately. I told him [Burnham] that you have to make working class people believe their best days are in front of them.
“That tax threshold of around £12,500 – if that hadn’t been frozen for the past few years it would have moved up to over £16,000 now. People at the lower end are paying eye-watering amounts of tax.”
The country’s biggest union Unison is calling for the chancellor to increase tax on large tech companies to finance public sector investment and the transition to green energy.
It is also calling for the Treasury to commission research into whether the balance of taxation needs to move from income to wealth.
Last year, the Institute for Fiscal Studies has unveiled a report highlighting the consequences of the ongoing freeze on income tax thresholds – particularly affecting the lowest-paid workers.
The study said: “In fiscal terms, the impact of threshold freezes has already been substantial. Freezes to the thresholds at which the basic (20%) and higher (40%) rates of income tax begin to apply are alone expected to raise £39 billion a year in 2029–30 (roughly similar to the amount of revenue that would be raised by increasing all rates of income tax by 31⁄2 percentage points). ”The threshold freezes mean that, all else equal, anyone paying income tax or NICs (National Insurance Contributions) will see their taxes increase. An additional impact of frozen thresholds is that a substantial minority of taxpayers will face higher marginal tax rates (for example, by going from being a basic-rate to a higher-rate income tax payer).”
The IFS revealed that increases to the minimum wage were progressively being absorbed by workers being compelled to pay higher taxes.
The organisation stated: “More minimum wage workers are being brought into income tax – driven by both the tax freezes and substantial minimum wage increases. In 2015–16, just before the minimum wage started rising rapidly, a minimum wage worker would have needed to work 31 hours a week for a year to pay income tax.”
It said the decision by then Chancellor Rachel Reeves means that figure falls to just 18 hours by 2029–30 – the lowest level since the minimum wage was introduced in 1999. “In other words, increasingly, even part-time minimum wage workers can expect to pay at least some income tax on their earnings.
“One consequence of this is to reduce how much of a minimum wage rise goes to workers, with more of the pay rise being recouped by the exchequer in the form of tax. A freeze extension would result in a full-time minimum wage worker paying £137 per year more in tax relative to current policy and £759 more than if there had been no freezes in the first place.”