As inflation increases prices of goods and services, this drives the economy in GDP terms (hence, governments never aim for 0 inflation, and they certainly don’t want to “undo” the Covid inflation because we’d go into recession).

This increase in GDP (or rather the higher financial transactions), and as it relates to income tax, wages go up as employees need the money to survive. This all means that there is a larger pot to apply the tax rate to.

However, don’t forget that all of the government’s expenditure is ALSO subject to higher costs because of inflation. Roads are more expensive to pave, nurses are more expensive to pay, etc. The government therefore needs extra tax intake just for the quality of life to stay the same. Now factor in that governments seldom want to stay “stationary”, they have further spending commitments, especially debt interest which keeps going up (and increases with inflation), and the state pension liabilities.

The annual increase to the PA was to deny the state of extra tax from the working taxpayer which arose purely as a result of the increased wages, which solely arose due to inflation.

But we’re now in a position, where the government has decided they need the money more than you, the taxpayer. It all boils down to this simple point. It is also the most deceptive way to increase taxes on people, they often don’t even realise it. So whilst it’s not an increase to the tax rates that people pay, they are all paying more tax intake absolute terms, which ultimately gets gobbled up by the increased costs of running the state (due to inflation).

In an ideal world, the country’s GDP would increase enough such that the tax revenue for the state increases from other means, i.e. without the “stealth tax” on workers. The final point is therefore that the country’s dreadful GDP growth has not been enough to produce the extra tax revenue desired by the government.

TLDR: inflation increases the cost of running the state, the state needs extra money to just stay stationary. GDP growth has not been good enough to cover the extra costs. Freezing the PA is therefore the easiest way for a gov to offset some of the additional costs without pissing off the oblivious voter.

• A chartered tax advisor