Millions of employees are set to face higher tax bills following an announcement by Rachel Reeves to prolong the freeze on tax thresholds. Originally scheduled to remain unchanged until April 2028, the income tax personal allowance of £12,570 will now be frozen for an additional three years, running until the conclusion of the 2030/31 financial year. This extension, longer than anticipated, was revealed in pre-Budget documents released by the Office for Budget Responsibility (OBR).
The OBR projects that the freeze on tax thresholds will lead to an increase in the number of taxpayers, with 780,000 more individuals falling into the basic-rate tax category, 920,000 into the higher-rate tax bracket, and 4,000 into the additional-rate tax band by 2029/30.
Referred to as fiscal drag, the halting of tax brackets results in more individuals being pushed into higher tax brackets as their incomes rise gradually. This method, known as a stealth tax, enables the government to collect additional tax revenue without officially raising tax rates.
In a further update, Rachel Reeves confirmed that individuals solely receiving the basic or new state pension will be exempted from paying minimal tax through Simple Assessment. The full state pension is marginally below the £12,570 personal allowance, prompting the Chancellor to maintain all income tax and equivalent National Insurance thresholds at their existing levels for an additional three years from 2028. This move ensures that pensioners in receipt of the basic or new state pension will not incur small tax payments via Simple Assessment starting in April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, described the tax freeze as a significant stealth tax hike, emphasizing the substantial impact on income tax and National Insurance burdens over time. He highlighted the noticeable shift, with one in five taxpayers now paying the two highest tax rates compared to just one in ten at the beginning of the century.
The personal allowance signifies the income threshold before individuals begin paying taxes. Earnings exceeding this amount are subject to the basic 20% income tax rate, while the higher 40% rate applies to incomes above £50,270, and the additional 45% rate comes into effect for earnings surpassing £125,140.
Additionally, the National Insurance payment threshold is fixed at £12,570. Contributions start at 8% for earnings above this threshold and increase to 2% for incomes beyond £50,270.
