MILLIONS of low-earners face a stealth tax rise after the government's mini Budget announcement.
Chancellor Kwasi Kwarteng revealed a tax cut for millions of workers as he reversed a previous National Insurance hike.
And he also brought forward a planned cut to the basic rate of income tax.
But a freeze on tax bands remains in place, meaning as people earn more they face paying more tax.
Around 5million workers are expected to be dragged into paying tax over the next four years because their income will go over the tax-free personal allowance of £12,570.
A further 3.9million middle-income earners will be pulled into the 40% tax bracket as wages increase over time.
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That's according to forecasts by the Centre for Economics and Business Research (CEBR).
The thresholds for income tax generally rise each year so that people can earn more without paying more tax.
But the tax bands were frozen by former Chancellor Rishi Sunak in 2021 until 2026.
Basic rate tax payers pay 20% on earnings over £12,570, while higher rate payers are charged 40% on earnings over £50,270.
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But it's been dubbed a "stealth" tax rise, as despite not making a change, more people will pay it.
And a freeze is essentially a pay cut once you take into account the rate of inflation, which is currently almost 10%.
The rising price of goods means more of your income is going on essentials.
Myron Jobson, senior personal finance analyst at interactive investor said: "While a 1p cut to the basic rate of income tax from April 2023 and the scrapping of the additional rate tax band were announced in the mini Budget, the income tax thresholds remain untouched."
"No change in the income tax threshold and rampant inflation is a toxic combination that is set to wipe thousands off pay packets in the coming years.
"This leaves less money in our pockets and makes it harder to save and invest to build wealth.
"Known as ‘fiscal drag’, this is the ultimate stealth tax which feels particularly tough at a time when so many people are struggling to keep up with rising prices."
Mr Kwarteng on Friday revealed a reversal of a 1.25 percentage point National Insurance hike that took place in April.
It will mean the average worker will be £330 a year better off from November 6.
And a planned cut to the basic rate of income tax from 20% to 19% will come in earlier from April 2023.
For someone earning £25,000 it will save them around £125 a year.
The exact amount you'll save depends on how much you earn.
Meanwhile higher earners were handed a tax bonanza as the government abolished the top rate of tax.
It means that anyone earning more than £150,000 will be able to keep more of their earnings
Their tax will go down to 40% for anything above £50,000. previously they paid 45% on any earnings over £150,000.
How to avoid paying more tax
There are ways for keeping your tax lower if you creep over the next threshold.
You might want to consider a salary sacrifice scheme.
This is where the government will let you give up a portion of your salary and spend it on certain things free of tax – like a bike for work or rail season ticket.
You don't pay tax on the portion of your wages that goes towards paying for these schemes, lowering the amount of income tax you pay overall.
You could also pay more into your pension to bring you below the threshold.
When you pay into your pension, some of the money that would have been paid as tax goes towards your pot – and this reduces the amount of tax you pay.
But remember that paying into this will leave you unable to access that cash in the short term.
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Meanwhile half a million retirees face bigger tax bills next year.
The frozen income tax thresholds, combined with a state pension increase next year, could lead to fresh tax bills for pensioners who go over the tax-free threshold.
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