Millions of employees are set to face higher tax bills as Rachel Reeves announces an extension of the freeze on tax thresholds. Originally planned to remain static until April 2028, the income tax personal allowance of £12,570 will now be prolonged for an additional three years, lasting until the conclusion of the 2030/31 financial year. The Office for Budget Responsibility (OBR) confirmed this development in advance of the Budget release.
According to OBR estimates, the freeze in tax thresholds will lead to an increase of 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers by 2029/30. This phenomenon, known as fiscal drag, progressively pushes individuals into higher tax brackets as their incomes rise. It is also referred to as a stealth tax, enabling the government to collect more tax revenue without explicitly raising tax rates.
In an update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will be exempt from paying minor tax amounts through Simple Assessment. The new full state pension is marginally below the £12,570 personal allowance. Reeves stated, “I will maintain all income tax and equivalent National Insurance thresholds at their current level for three additional years starting in 2028, while exempting those solely on the basic or new state pension from paying minor taxes through Simple Assessment from April 2027.”
Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concerns over the significant stealth tax increase, emphasizing the escalating income tax and National Insurance burden over time. He highlighted the shift from one in ten taxpayers subject to higher-rate tax at the turn of the century to the current scenario where a fifth of taxpayers fall into the two highest tax brackets.
The personal allowance denotes the income threshold before tax obligations commence. Income above this threshold incurs the basic 20% tax rate, with the higher 40% rate applicable on earnings surpassing £50,270 and the additional 45% rate triggered beyond £125,140. Similarly, the National Insurance payment threshold is fixed at £12,570, with an 8% contribution on earnings from this point and a 2% contribution on earnings exceeding £50,270.