Millions of employees are set to face higher tax payments as Rachel Reeves has announced an extension of the freeze on tax thresholds. Originally planned until April 2028, the income tax personal allowance of £12,570 will now remain frozen for an additional three years, extending until the end of the 2030/31 financial year. This decision, revealed in advance documents by the Office for Budget Responsibility (OBR), goes beyond previous expectations of a two-year extension.
The OBR forecasts that this freeze will lead to an increase in the number of income tax payers in various brackets by 2029/30, including 780,000 more in the basic-rate, 920,000 more in the higher-rate, and 4,000 more in the additional-rate categories.
Described as fiscal drag, the freezing of tax brackets pulls more individuals into higher tax tiers as their incomes rise gradually. It is also referred to as a stealth tax, allowing the government to boost tax revenue without explicitly 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. With the full state pension just below the £12,570 personal allowance, the Chancellor emphasized the maintenance of current income tax and National Insurance thresholds until 2028, protecting pensioners from such tax obligations starting April 2027.
Commenting on the impact, Jason Hollands, managing director at Evelyn Partners, criticized the move as a substantial stealth income tax increase with the potential to significantly burden taxpayers over time. He highlighted the shift from one in ten to one in five taxpayers now subject to higher tax rates.
The personal allowance marks the income threshold before tax obligations kick in, with the basic 20% rate applying once earnings exceed this limit. Higher tax rates of 40% and 45% engage at earnings surpassing £50,270 and £125,140, respectively. The National Insurance payment threshold mirrors the personal allowance at £12,570, with contribution rates set at 8% for earnings above this and 2% for incomes exceeding £50,270.
