Millions of workers are set to face higher tax payments as Rachel Reeves has announced an extension of the freeze on tax thresholds. Originally scheduled to remain stagnant until April 2028, the income tax personal allowance of £12,570 will now be frozen for an additional three years, extending until the end of the 2030/31 financial year. The decision, revealed during the Budget, is longer than anticipated, with preliminary reports suggesting a two-year extension.
This update, confirmed by the Office for Budget Responsibility (OBR) in documents preceding the Budget, projects that the freeze in tax thresholds will lead to an increase of 780,000 basic-rate, 920,000 higher-rate, and 4,000 additional-rate income tax payers in 2029/30.
Fiscal drag, commonly known as the freezing of tax brackets, results in individuals moving into higher tax brackets as their earnings rise over time. This strategy, often referred to as a stealth tax, enables the government to collect more tax without adjusting the tax rates directly.
In a subsequent announcement, Rachel Reeves assured that individuals solely receiving the basic or new state pension will not be subjected to paying minor amounts of tax through Simple Assessment. The new full state pension closely aligns with the £12,570 personal allowance, with the Chancellor emphasizing the preservation of all income tax and equivalent National Insurance thresholds at their current levels for an additional three years starting from 2028.
Commenting on the implications, Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concerns over the significant rise in income tax through this stealth approach. He highlighted the substantial impact of this policy in escalating the income tax and National Insurance burden over time, noting a shift from a minority to a notable portion of taxpayers now subject to higher tax rates.
The personal allowance denotes the income threshold before tax obligations commence, with the basic 20% rate applying to earnings exceeding this limit. Higher earnings trigger the 40% rate above £50,270, while the additional 45% rate becomes applicable beyond £125,140.
Similarly, the National Insurance payment threshold is aligned with the £12,570 personal allowance. Contributions begin at 8% for earnings at this level, increasing to 2% for incomes surpassing £50,270.