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 planned to be frozen until April 2028 at £12,570, will now remain unchanged for an additional three years, stretching until the end of the 2030/31 financial year. This decision, revealed during the Budget announcement, was confirmed in advance documents released by the Office for Budget Responsibility (OBR).
According to the OBR, the prolonged freeze on tax thresholds is anticipated to lead to 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers by 2029/30. This strategy, known as fiscal drag, gradually pushes individuals into higher tax brackets over time as their incomes rise. It is also referred to as a stealth tax, enabling the government to collect more tax revenue without officially raising tax rates.
In a recent update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will be exempt from paying small tax amounts through Simple Assessment. The new full state pension aligns closely with the £12,570 personal allowance. Reeves stated, “I will maintain all income tax and equivalent National Insurance thresholds at their current levels for three more years starting in 2028, ensuring that those with only the basic or new state pension do not incur minor tax payments through Simple Assessment from April 2027.”
Jason Hollands, managing director at Evelyn Partners, described the tax policy as a substantial hidden income tax increase, emphasizing the significant impact it will have on income tax and National Insurance obligations over time. He highlighted the growth in the number of taxpayers subject to higher tax rates, pointing out that currently, one-fifth of taxpayers are paying the two highest tax rates, a stark contrast to the figures from the beginning of the century.
The personal allowance signifies the threshold at which most individuals begin paying taxes. Earnings exceeding this amount trigger the basic 20% income tax rate, while the higher 40% rate applies to incomes surpassing £50,270. Additionally, the additional 45% rate comes into effect once earnings exceed £125,140. The National Insurance payment threshold is also established at £12,570, with an 8% contribution rate on earnings above this amount and a 2% rate on incomes exceeding £50,270.