Millions of workers are set to face increased tax payments following Rachel Reeves’ announcement of an extension to the freeze on tax thresholds. Originally scheduled to remain stagnant until April 2028, the income tax personal allowance of £12,570 will now continue to be frozen for an additional three years, stretching until the conclusion of the 2030/31 financial year. This extension surpasses earlier forecasts, as pre-Budget reports hinted at a possible two-year extension.
The Office for Budget Responsibility (OBR) confirmed this news in documents released ahead of the Budget announcement. According to OBR estimates, the freeze on tax thresholds is anticipated to push 780,000 more individuals into the basic-rate tax category, 920,000 into the higher-rate tax bracket, and an additional 4,000 into the top-rate tax segment by 2029/30.
Referred to as fiscal drag, the prolonged freeze on tax brackets gradually leads more taxpayers into higher tax brackets over time as their incomes rise. This method, often labeled as a stealth tax, allows the government to collect more tax revenue without overtly raising tax rates.
In a recent update, Rachel Reeves clarified that individuals solely receiving the basic or new state pension will be exempt from paying small tax amounts through Simple Assessment. Notably, the full state pension hovers just below the £12,570 personal allowance. Reeves emphasized the maintenance of all income tax and equivalent National Insurance thresholds at their present levels for an additional three years starting in 2028, ensuring pensioners in receipt of the basic or new state pension are not subjected to minor tax obligations through Simple Assessment beginning April 2027.
Jason Hollands, managing director at Evelyn Partners, criticized the move as a significant stealth tax hike, highlighting the substantial impact of this policy on increasing the income tax and National Insurance burden in the coming years. He noted the stark shift from only a tenth of taxpayers paying higher-rate tax at the beginning of the century to the current scenario where a fifth of taxpayers are now subject to the two highest tax rates.
The personal allowance signifies the threshold at which most individuals begin paying taxes. Earnings exceeding this amount incur the basic 20% income tax rate, while the higher 40% rate applies to income surpassing £50,270, and the additional 45% rate kicks in for earnings over £125,140. Similarly, the National Insurance payment threshold is fixed at £12,570, with an 8% contribution on earnings at this level and a subsequent 2% rate on incomes exceeding £50,270.