Millions of employees will face increased tax payments as Rachel Reeves announced an extension of the freeze on tax thresholds. The income tax personal allowance, currently at £12,570, was initially set to remain frozen until April 2028. However, the Chancellor’s Budget revealed an additional three-year extension to this freeze, now stretching until the end of the 2030/31 financial year. This news, outlined by the Office for Budget Responsibility (OBR) before the Budget announcement, indicates that the freeze in tax thresholds is anticipated to lead to an increase of 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers by 2029/30.
The concept of freezing tax brackets, known as fiscal drag, gradually moves more individuals into higher tax brackets as their incomes rise. This practice is also referred to as a stealth tax, allowing the government to collect more tax revenue without officially raising tax rates. In a recent update, Rachel Reeves confirmed that individuals solely receiving the basic or new state pension will be exempt from paying small amounts of tax through Simple Assessment.
The Chancellor further stated that all income tax and equivalent National Insurance thresholds will be maintained at their current levels for an additional three years starting in 2028. This move aims to prevent individuals receiving only the basic or new state pension from being taxed through Simple Assessment starting April 2027. Jason Hollands, managing director at Evelyn Partners, described this as a significant stealth income tax increase, emphasizing the potential long-term impact on taxpayers. The proportion of taxpayers subject to higher-rate tax has notably risen over the years, with now one-fifth of taxpayers paying the two highest tax rates.
The personal allowance signifies the threshold at which most individuals begin paying taxes, with the basic 20% rate applied to earnings exceeding this amount. Higher-rate tax of 40% is levied on incomes surpassing £50,270, while the additional 45% rate is triggered when earnings exceed £125,140. The National Insurance payment threshold mirrors the personal allowance at £12,570, with an 8% contribution rate on earnings above this threshold, and a 2% rate on earnings over £50,270.