Millions of workers are set to face higher tax bills as Rachel Reeves has announced an extension of the freeze on tax thresholds. The income tax personal allowance, currently at £12,570, was initially planned to remain frozen until April 2028. However, in today’s Budget, the Chancellor revealed that this freeze will now be prolonged for an additional three years, keeping income tax thresholds stagnant until the end of the 2030/31 financial year.
The Office for Budget Responsibility (OBR) disclosed this information in documents released prior to the Budget announcement. According to OBR estimates, the freeze in tax thresholds is expected to lead to an increase of 780,000 basic-rate, 920,000 higher-rate, and 4,000 additional-rate income tax payers by 2029/30.
This move, known as fiscal drag, gradually pulls more individuals into higher tax brackets as their incomes rise over time. It is often referred to as a stealth tax, allowing the government to collect more tax without officially raising tax rates.
In a further update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will not have to pay small amounts of tax through Simple Assessment. The full state pension is marginally below the £12,570 personal allowance. The Chancellor stated that all income tax and equivalent National Insurance thresholds will be maintained at their current levels for an additional three years starting from 2028, ensuring pensioners on the basic or new state pension are exempt from small tax payments through Simple Assessment from April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, described this move as a significant stealth income tax increase, highlighting its potential to escalate the income tax and National Insurance burden over time. He noted that the proportion of taxpayers subject to higher-rate tax has grown substantially, with a fifth of taxpayers now falling into the two highest tax brackets.
The personal allowance defines the threshold at which individuals begin paying income tax. Earnings above this amount are taxed at the basic rate of 20%. The higher rate of 40% applies to income exceeding £50,270, while the additional rate of 45% kicks in when earnings surpass £125,140.
The National Insurance payment threshold is also set at £12,570. Individuals contribute 8% in National Insurance on earnings above this level and 2% on income beyond £50,270.