Millions of employees are set to face increased tax payments following Rachel Reeves’ decision to prolong the freeze on tax thresholds.
Initially scheduled to remain at £12,570 until April 2028, the income tax personal allowance freeze has been extended for an additional three years as announced in today’s Budget. This extension means that income tax thresholds will now be stagnant until the conclusion of the 2030/31 financial year, surpassing earlier expectations of a two-year extension.
The Office for Budget Responsibility (OBR) revealed this information in documents released before the Budget, estimating that the freeze in tax thresholds will lead to an additional 780,000 basic-rate, 920,000 higher-rate, and 4,000 additional-rate income tax payers in 2029/30.
This tactic of freezing tax brackets, known as fiscal drag, gradually pushes more individuals into higher tax categories over time as their incomes rise. It is often referred to as a stealth tax, allowing the government to collect more revenue without overtly increasing tax rates.
In a supplementary update, Rachel Reeves confirmed that individuals solely receiving the basic or new state pension will be exempt from paying minor tax amounts through Simple Assessment. The full state pension is marginally below the £12,570 personal allowance, prompting the Chancellor to affirm the maintenance of current income tax and National Insurance thresholds until 2028, with the exemption for pension recipients starting in April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concern over the substantial stealth tax hike, emphasizing the significant impact on income tax and National Insurance burdens over time. He highlighted the stark increase in the proportion of taxpayers subject to higher tax rates compared to previous years.
The personal allowance denotes the threshold before individuals are liable to pay tax, with the basic 20% income tax rate applying once this limit is exceeded. Earnings surpassing £50,270 trigger the higher 40% rate, while the additional 45% rate is applicable on income exceeding £125,140.
Similarly, the National Insurance payment threshold is fixed at £12,570, with an 8% contribution rate for earnings above this amount and a 2% rate for income exceeding £50,270.