Millions of employees are set to face higher tax payments as Rachel Reeves has announced an extension of the freeze on tax thresholds. The income tax personal allowance, currently at £12,570, was scheduled to remain frozen until April 2028. However, in today’s Budget announcement, the Chancellor disclosed that this freeze will now be prolonged for an additional three years, extending until the end of the 2030/31 financial year. This extension surpasses earlier predictions, which had suggested a two-year extension.
The Office for Budget Responsibility (OBR) officially confirmed this news in documents released before the Budget presentation. According to OBR estimates, the freeze in tax thresholds is anticipated to lead to an increase in the number of taxpayers, with 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers in the 2029/30 fiscal year.
This move, known as fiscal drag, pulls more individuals into higher tax brackets over time as their incomes rise. It is also referred to as a stealth tax, allowing the government to collect more tax without overtly raising tax rates.
In an additional update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will be exempt from paying small amounts of tax through Simple Assessment. The new full state pension is marginally below the £12,570 personal allowance. The Chancellor emphasized the preservation of all income tax and equivalent National Insurance thresholds at their current levels for three additional years starting from 2028, ensuring that those reliant on the basic or new state pension will not incur small tax payments through Simple Assessment from April 2027.
Commenting on the announcement, Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concerns over the substantial rise in income tax through this stealth approach. He highlighted the significant impact of this policy in escalating the income tax and National Insurance burden over time.
The personal allowance signifies the threshold at which most individuals begin paying tax. Earnings exceeding this amount trigger the basic 20% income tax rate. The higher 40% rate applies to incomes above £50,270, while the additional 45% rate is imposed on earnings surpassing £125,140.
Moreover, the National Insurance payment threshold is also fixed at £12,570. Individuals start paying 8% in National Insurance contributions upon reaching this threshold, with a 2% contribution on earnings exceeding £50,270.