Millions of workers are set to face increased tax payments as Rachel Reeves has announced an extension of the freeze on tax thresholds. The income tax personal allowance, originally set at £12,570 until April 2028, will now remain frozen for an additional three years, stretching until the end of the 2030/31 financial year. This decision, longer than anticipated, was revealed in pre-Budget documents by the Office for Budget Responsibility (OBR).
The OBR projects that this freeze will lead to 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers in the 2029/30 tax year. This move, known as fiscal drag, pulls more individuals into higher tax brackets gradually as their incomes rise. Described as a stealth tax, it enables the government to collect higher tax revenues without officially raising tax rates.
In a recent update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will not be subject to small tax payments through Simple Assessment. The full state pension is marginally below the £12,570 personal allowance. Reeves stated that all income tax and equivalent National Insurance thresholds will be sustained at current levels for an additional three years from 2028, ensuring pensioners on basic or new state pensions are exempt from minor tax liabilities through Simple Assessment starting April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, criticized the extended freeze as a significant stealth tax hike. He highlighted the policy’s potential to substantially increase the income tax and National Insurance burden over time. Hollands noted a significant shift in tax liability over the years, with one in five taxpayers now paying the two highest tax rates, compared to one in ten at the beginning of the century.
The personal allowance signifies the threshold before individuals start paying income tax. Earnings above this threshold are subject to the basic 20% income tax rate, while the higher 40% rate applies to incomes exceeding £50,270, and the additional 45% rate kicks in when earnings surpass £125,140. Similarly, the National Insurance payment threshold is pegged at £12,570, with an 8% contribution on earnings above this and a 2% rate on incomes over £50,270.