Millions of employees are set to face higher tax bills following the announcement by Rachel Reeves to prolong the freeze on tax thresholds. Originally planned to stay at £12,570 until April 2028, the Chancellor revealed in the Budget that this freeze will now continue for an additional three years, stretching until the end of the 2030/31 financial year. This extension surpasses earlier expectations, as initial reports hinted at a possible two-year extension. The Office for Budget Responsibility (OBR) substantiated this information in documents released prior to the Budget.
The OBR’s projections suggest that due to the freeze in tax thresholds, there will be an increase of 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers by 2029/30.
Frequently referred to as fiscal drag, the freezing of tax brackets gradually pushes individuals into higher tax brackets over time as their incomes rise. This mechanism is also known as a stealth tax, enabling the government to collect more tax without directly raising tax rates.
In a subsequent update, Rachel Reeves confirmed that individuals solely reliant on the basic or new state pension will be exempt from making small tax payments through Simple Assessment. The full state pension closely aligns with the £12,570 personal allowance. The Chancellor announced the preservation of all income tax and equivalent National Insurance thresholds at their current levels for an additional three years from 2028, while ensuring pensioners on basic state pensions are not subject to minor tax payments via Simple Assessment starting in April 2027.
Jason Hollands, managing director at Evelyn Partners, labeled the prolonged freeze as a significant stealth tax increase, emphasizing its potential to escalate the income tax and National Insurance burden considerably over time. He highlighted the shift from only one in ten taxpayers paying higher-rate tax at the beginning of the century to the current scenario where one-fifth of taxpayers are subject to the two highest tax rates.
The personal allowance denotes the income threshold before tax liabilities kick in. Earnings above this threshold trigger the basic 20% income tax rate, with the 40% rate applicable on incomes exceeding £50,270 and the 45% rate on earnings surpassing £125,140.
The National Insurance payment threshold mirrors the personal allowance at £12,570, with an 8% contribution on earnings at this level and a 2% contribution on incomes exceeding £50,270.