Millions of workers are set to see an increase in their tax payments following the announcement by Rachel Reeves to prolong the freeze on tax thresholds.
Initially planned to remain stagnant until April 2028, the income tax personal allowance of £12,570 will now be extended for an additional three years as disclosed in today’s Budget by the Chancellor. This extension means that income tax thresholds will be frozen until the end of the 2030/31 fiscal year, surpassing earlier expectations of a two-year extension.
The Office for Budget Responsibility (OBR) confirmed this development in documents released ahead of the Budget, estimating that the freeze in tax thresholds will lead to a higher number of taxpayers across different income brackets by 2029/30, including 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate taxpayers.
This measure, known as fiscal drag, gradually pulls individuals into higher tax brackets as their incomes rise over time. Considered a stealth tax, the freeze allows the government to collect more tax without directly increasing tax rates.
In a further update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will be exempt from paying minimal taxes through Simple Assessment. The new full state pension is marginally below the £12,570 personal allowance, with the Chancellor committing to maintaining all income tax and National Insurance thresholds at their current levels for an additional three years from 2028.
Jason Hollands, managing director at wealth management firm Evelyn Partners, remarked that this policy represents a significant stealth income tax rise, emphasizing the substantial impact on income tax and National Insurance burdens over time. He highlighted the shift from a minority to a substantial portion of taxpayers now subject to higher tax rates.
The personal allowance signifies the threshold before individuals start paying taxes, with the basic 20% rate applicable to earnings exceeding this amount. Higher tax rates of 40% and 45% come into effect for earnings above £50,270 and £125,140, respectively. The National Insurance payment threshold is also fixed at £12,570, with an 8% contribution on earnings from this point and a 2% rate on earnings over £50,270.