Rachael Griffin, tax and financial planning expert at wealth manager Quilter discusses the impact of the freeze on tax thresholds.

The latest HMRC figures show the government’s decision to extend the freeze on tax thresholds to fill the gap in public finances will likely prove to be a lucrative one, Rachael Griffin at Quilter said this week.
 
“Receipts from Income Tax and National Insurance payments from April to November 2022 reached £251.4 billion ($303 billion) – an increase of £31.8 billion compared to the same period a year earlier,” she said in a statement.

“This rise will no doubt be music to the chancellor’s ears as just last month he announced Income Tax thresholds would be frozen until 2027/28, and this growing source of government income will only rise as the years progress,” she continued. “Likewise, the chancellor also opted to freeze Inheritance Tax thresholds also to 2027/28 – a move which is expected to net more than an additional £1 billion for government coffers according to OBR forecasts.

The "fiscal drag" effect of not changing the level at which a tax rate kicks in - known in the US as "bracket creep" - is how governments can garner more revenue without having to raise the actual rate. During times of inflation, this means more and more people end up falling into higher tax brackets without them often realising it. In the past legislators have demanded governments adjust brackets automatically in line with inflation. Governments have piled up huge debts in recent years, magnified by the costs of covid lockdowns and energy policies.

Inheritance
The statement comes after it was announced that the inheritance tax threshold of £325,000 will be frozen until April 2028, on top of the current four-year freeze. The figures demonstrate how much the government’s inheritance tax take seems to be increasing, due largely to the steady increases in house prices which are pushing more regular hardworking families above the threshold who are relying on money being passed down through the generations.

There is also a Residence Nil Rate band worth £175,000 which allows most people to pass on a family home more tax efficiently to direct descendants, although this tapers for estates over £2 million and is not available at all for estates worth over £2.35 million.

“Inheritance Tax and the increasing number of people it impacts is often a source of contention, and this morning’s data will no doubt add to this. IHT receipts from April to November 2022 were £4.8 billion, an increase of £0.6 billion compared to the same period a year earlier,” she said.
 
“Inheritance Tax is fast becoming a profitable area for the government, largely due to the rapid rise in house prices seen in recent years causing more people to tip over the threshold,” she continued. 

“Despite this, just last week the Institute for Fiscal Studies called for reform to the tax treatment of pensions on death on the grounds of fairness as it deemed pensions to be ‘a highly effective way of avoiding inheritance tax’, but such reform would likely only make things fairer for the exchequer and not for bereaved families. Making pensions subject to IHT would be counter-intuitive to encouraging people to save for their retirement, and with the lack of certainty on the direction of social care it is crucial that people continue to put their own financial plans in place,” she said.
 
“Given IHT thresholds have already been frozen, more and more people will already be dragged into paying what is often regarded as one of the nation’s most hated taxes, let alone if pensions were to be brought into the mix,” she added. 

“IHT has traditionally been viewed as a tax on wealthier individuals, but the number of people caught in the IHT net has been rising steadily for some time now and this number will only continue to rise as we move further into the freeze,” she said. 

“Where possible, you should seek professional financial advice to help mitigate IHT costs through careful planning – particularly for the more complex areas such as the Residence Nil Rate Band which is not freely available and has restrictions on how and when it can be used,” she continued.