Millions of employees are set to see an increase in their tax payments following an announcement by Rachel Reeves to prolong the freeze on tax thresholds. Originally scheduled to remain static until April 2028, the income tax personal allowance of £12,570 will now be extended for an additional three years as revealed in today’s Budget. This freeze will now be in effect until the conclusion of the 2030/31 fiscal year, a longer duration than previously anticipated. The Office for Budget Responsibility (OBR) disclosed this development in documents released before the Budget presentation.
The OBR projects that the freeze in tax thresholds will lead to an additional 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers in the 2029/30 taxation year.
Described as fiscal drag, the freezing of tax brackets gradually pulls more individuals into higher tax brackets over time as their incomes rise. This approach is commonly known as a stealth tax, allowing the government to collect more taxes without overtly increasing tax rates.
In a supplementary update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will be exempt from paying minor tax amounts through Simple Assessment. The full state pension is marginally below the £12,570 personal allowance. The Chancellor confirmed the preservation of all income tax and equivalent National Insurance thresholds at their existing levels for an additional three years starting from 2028, ensuring those reliant solely on the basic or new state pension are not subject to minor tax payments through Simple Assessment from April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, criticized the decision, labeling it a substantial stealth income tax hike. Hollands highlighted the significant impact of this policy on increasing the income tax and National Insurance burden over time, emphasizing the substantial rise in the number of taxpayers subject to higher tax rates.
The personal allowance signifies the threshold before tax liability begins for most individuals. Earnings exceeding this amount are subject to the basic 20% income tax rate. The higher 40% rate applies to incomes over £50,270, while the additional 45% rate is imposed on earnings surpassing £125,140.
The National Insurance payment threshold is also established at £12,570, with an 8% contribution on earnings at this level and a subsequent 2% rate on incomes exceeding £50,270.