Millions of workers are set to face higher tax payments 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 announcement, the Chancellor revealed that this freeze will now continue for an additional three years, taking it through the 2030/31 financial year. This extension, which was longer than anticipated, was disclosed in documents released by the Office for Budget Responsibility (OBR).
The OBR projects that the freeze in tax thresholds will lead to an increase of 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers by 2029/30.
This move, known as fiscal drag, pulls more individuals into higher tax brackets over time as their incomes rise. It is considered a stealth tax, enabling the government to collect more tax without raising the tax rates directly.
In a further update, Rachel Reeves clarified that individuals solely receiving the basic or new state pension will be exempt from paying small amounts of tax through Simple Assessment. The new full state pension aligns closely with the £12,570 personal allowance. The Chancellor emphasized the preservation of current income tax and National Insurance thresholds for an additional three years from 2028, while safeguarding basic or new state pension recipients from minor tax obligations through Simple Assessment starting April 2027.
Commenting on the announcement, Jason Hollands, managing director at wealth management firm Evelyn Partners, described the extension as a substantial stealth tax increase. He highlighted the profound impact of this policy in escalating the income tax and National Insurance burden over time, noting a significant shift from one in ten taxpayers being subject to higher rate tax at the start of the century to now one-fifth of taxpayers paying the two highest tax rates.
The personal allowance represents the earnings threshold before tax liability begins. Incomes exceeding this threshold are subject to the basic 20% income tax rate. The higher 40% rate applies to earnings surpassing £50,270, while the additional 45% rate becomes applicable beyond £125,140.
The National Insurance payment trigger is also set at £12,570, with an initial 8% contribution rate on earnings at this level and a subsequent 2% rate on incomes exceeding £50,270.