Tax Thresholds Stay Frozen for Three More Years
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The government has decided to keep tax thresholds frozen for three more years. These thresholds decide when people start paying tax on their income.
A tax threshold is the amount of money you can earn before you have to pay tax. There is also a point where people move into a higher tax band, meaning they pay more tax on the money above a certain level.
Both of these points will stay the same for three years instead of rising. Normally, thresholds can be adjusted so they keep up with the cost of living.
This kind of freeze is sometimes called fiscal drag. It happens when thresholds do not rise, even though wages increase over time.
As people's wages grow, more of their income passes the frozen threshold. This means they end up paying tax on money that would not have been taxed before.
It can also push more workers into the higher tax band, even if their pay rise was small. In effect, many people will pay more tax without any change in the tax rate itself.
Although the headline tax rates have not changed, this freeze means take-home pay could still be affected for millions of workers.
The freeze is expected to bring in more money for the government over time, since more income becomes taxable as wages rise.
For many workers, this freeze may be more important for their pay than any change in tax rates, because it quietly increases the amount of tax they pay each year.
Vocabulary5 words
- tax threshold
- the amount of money you can earn before paying tax
- higher tax band
- a level where you pay more tax on extra money
- fiscal drag
- when frozen tax limits cause people to pay more tax as wages rise
- take-home pay
- the money you keep after tax is taken away
- cost of living
- how much money people need to pay for daily life
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Quiz
Answer key
1. Tax thresholds 2. When frozen thresholds cause more tax to be paid as wages rise 3. True
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Fill-in-the-blank listening
Play the audio again and fill in the missing words as you listen.
The government has decided to keep tax _____ frozen for three more years. These thresholds decide when people start paying tax on their income.
A tax threshold is the amount of money you can earn before you have to pay tax. There is also a point where people move into a higher tax _____, meaning they pay more tax on the money above a certain level.
Both of these points will stay the same for three years instead of _____. Normally, thresholds can be adjusted so they keep up with the cost of living.
This kind of freeze is sometimes called fiscal _____. It happens when thresholds do not rise, even though wages increase over time.
As people's wages grow, more of their income passes the frozen _____. This means they end up paying tax on money that would not have been taxed before.
It can also push more workers into the higher tax band, even if their pay rise was _____. In effect, many people will pay more tax without any change in the tax rate itself.
Although the headline tax rates have not changed, this freeze means take-home _____ could still be affected for millions of workers.
The freeze is expected to bring in more money for the _____ over time, since more income becomes taxable as wages rise.
For many workers, this freeze may be more _____ for their pay than any change in tax rates, because it quietly increases the amount of tax they pay each year.
Discussion questions
- Why do you think governments sometimes freeze tax thresholds instead of raising tax rates?
- How might a frozen tax threshold affect someone whose wages rise each year?
- Do you think fiscal drag is a fair way to collect more tax? Why or why not?
- How could this policy change people's spending habits?
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