Millions of employees are set to face higher tax payments following Rachel Reeves’ decision to extend the freeze on tax thresholds. The income tax personal allowance, originally planned to remain at £12,570 until April 2028, will now be frozen for an additional three years, as announced in today’s Budget by the Chancellor.
This extension means that income tax thresholds will stay unchanged until the end of the 2030/31 financial year, a longer period than initially anticipated. Prior to the Budget, there were speculations that the freeze could be prolonged for two more years, but the official confirmation came through documents released by the Office for Budget Responsibility (OBR).
According to OBR estimates, the freeze in tax thresholds is expected to lead to 780,000 more basic-rate taxpayers, 920,000 more higher-rate taxpayers, and 4,000 more additional-rate taxpayers in 2029/30.
Rachel Reeves also clarified that individuals solely receiving the basic or new state pension will be exempt from paying minimal taxes through Simple Assessment. The Chancellor emphasized the importance of maintaining current income tax and National Insurance thresholds until 2028 and ensuring pensioners are not burdened with unnecessary tax payments starting in April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concerns over the stealth tax implications of these changes, highlighting the significant impact on income tax and National Insurance obligations over time. He noted the substantial increase in the number of taxpayers subjected to higher tax rates compared to previous years.
The freezing of tax brackets, commonly referred to as fiscal drag, gradually pushes individuals into higher tax brackets as their incomes rise. This method is considered a stealth tax strategy, enabling the government to collect more taxes without explicitly raising tax rates.
The personal allowance dictates the threshold at which individuals begin paying income tax, currently set at £12,570. Earnings exceeding this amount are subject to the basic 20% income tax rate, with higher rates of 40% and 45% applying to higher income levels. Similarly, National Insurance contributions start at £12,570, with an 8% rate for earnings at this level and a 2% rate on incomes surpassing £50,270.
Stay updated on the latest financial news and offers by joining our Money WhatsApp group or subscribing to Mirror’s Money newsletter for exclusive deals and advice straight to your inbox.