Millions of employees are set to face increased tax payments as Rachel Reeves has announced an extension of the freeze on tax thresholds. Originally planned to remain stagnant until April 2028, the income tax personal allowance of £12,570 will now be frozen for an additional three years following the Chancellor’s Budget announcement.
This decision means that income tax thresholds will now be fixed until the conclusion of the 2030/31 financial year, exceeding earlier expectations of a two-year extension. The Office for Budget Responsibility (OBR) confirmed this development in documents released prior to the Budget presentation.
According to OBR projections, the freeze on tax thresholds is predicted to elevate the number of basic-rate taxpayers by 780,000, higher-rate taxpayers by 920,000, and additional-rate taxpayers by 4,000 in the 2029/30 fiscal year.
Fiscal drag, the term for the freezing of tax brackets, will result in more individuals being pushed into higher tax brackets over time as their incomes rise. This approach is often referred to as a stealth tax since it enables the government to collect more tax without raising the actual tax rates paid by individuals.
In an additional update, Rachel Reeves clarified that individuals solely receiving the basic or new state pension will be exempt from making small tax payments through Simple Assessment. The full state pension is marginally below the £12,570 personal allowance, prompting the Chancellor to state that all income tax and equivalent National Insurance thresholds will be maintained at their current levels for a further three years starting in 2028.
Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concerns about the significant stealth tax increase in income tax, emphasizing the policy’s ability to escalate the income tax and National Insurance burden over time. He highlighted the substantial rise in the proportion of taxpayers subject to higher tax rates compared to previous years.
The personal allowance signifies the income threshold below which most individuals are not liable to pay tax. Earnings above this threshold attract the basic 20% income tax rate, while the higher 40% rate applies to income exceeding £50,270, and the additional 45% rate is levied on earnings surpassing £125,140.
Moreover, the National Insurance payment threshold is also set at £12,570, with an 8% contribution on earnings at this level and a 2% contribution on income exceeding £50,270.