Millions of employees are set to face higher tax payments following Rachel Reeves’ announcement of an extension to the freeze on tax thresholds. Originally planned to remain stagnant until April 2028, the Chancellor revealed in today’s Budget that the freeze will now continue for an additional three years, stretching until the end of the 2030/31 financial year. This extension, longer than anticipated, was disclosed in reports by the Office for Budget Responsibility (OBR) preceding the Budget announcement.
According to OBR projections, the freeze on tax thresholds is expected to lead to an increase in the number of taxpayers across different income brackets in 2029/30, with an estimated 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate taxpayers.
This approach, known as fiscal drag, gradually moves individuals into higher tax brackets as their incomes rise, constituting a form of stealth tax where the government collects more revenue without officially raising tax rates. Furthermore, Rachel Reeves clarified that individuals solely receiving the basic or new state pension will be exempt from paying small tax amounts via Simple Assessment.
Describing the move as a significant stealth tax hike, Jason Hollands, managing director at wealth management firm Evelyn Partners, emphasized the substantial impact of this policy on increasing the tax burden over time. He noted the substantial shift in the taxpayer landscape, with now one-fifth of taxpayers subject to the two highest tax rates compared to just one in ten at the beginning of the century.
The personal allowance, the threshold before income tax is levied, currently stands at £12,570. Income above this limit incurs a 20% basic rate tax. Higher earnings trigger the 40% higher rate tax above £50,270, with a further 45% additional rate tax applicable beyond £125,140.
Similarly, the National Insurance starting threshold is aligned with the personal allowance at £12,570, with an 8% contribution rate for incomes at this level and a 2% rate for earnings exceeding £50,270.