Millions of workers are set to face increased tax payments following Rachel Reeves’ decision to prolong the freeze on tax thresholds. The income tax personal allowance, currently at £12,570, was initially slated to remain unchanged until April 2028. However, the Chancellor’s Budget announcement revealed an extension of this freeze for an additional three years, now stretching until the conclusion of the 2030/31 financial year, surpassing previous expectations.
The Office for Budget Responsibility (OBR) confirmed this development in pre-Budget documents, estimating that the freeze on tax thresholds would lead to a notable rise in the number of taxpayers across various income brackets by 2029/30. Specifically, projections indicate an increase of 780,000 basic-rate, 920,000 higher-rate, and 4,000 additional-rate taxpayers.
Referred to as fiscal drag, the freezing of tax brackets gradually pushes individuals into higher tax categories as their incomes rise. This tactic, often labeled a stealth tax, allows the government to generate more revenue without directly raising tax rates.
In a further update, Rachel Reeves assured that individuals solely reliant on the basic or new state pension would be exempt from minor tax payments through Simple Assessment. With the full state pension closely approaching the £12,570 personal allowance, the Chancellor emphasized maintaining current income tax and National Insurance thresholds for an additional three years starting from 2028, while safeguarding pensioners from such tax liabilities effective April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, criticized the move as a significant stealth tax increase, emphasizing its potential to escalate the income tax and National Insurance burden substantially over time. He highlighted a significant shift from earlier decades, with a growing proportion of taxpayers now subjected to higher tax rates.
The personal allowance denotes the threshold before income tax becomes applicable, with the basic 20% rate activated beyond this point. Earnings surpassing £50,270 trigger the higher 40% rate, and the additional 45% rate comes into play when income exceeds £125,140. Similarly, National Insurance contributions commence when earnings hit £12,570, with an 8% rate applying initially and a 2% rate on income exceeding £50,270.