Millions of workers will face increased tax payments as Rachel Reeves announced the extension of the freeze on tax thresholds. Originally planned to remain stagnant until April 2028, the income tax personal allowance at £12,570 will now be frozen for an additional three years, stretching until the end of the 2030/31 financial year. This decision, revealed in advance documents by the Office for Budget Responsibility (OBR), surpasses earlier speculations of a two-year extension.
The OBR forecasts that this freeze will lead to 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers by 2029/30. Described as fiscal drag, the freezing of tax brackets brings more individuals into higher tax brackets over time as their incomes rise. This tactic is also known as a stealth tax, allowing the government to boost tax revenue without officially raising tax rates.
In an additional update, Rachel Reeves highlighted that individuals solely reliant on the basic or new state pension will be exempt from making small tax payments through Simple Assessment. With the new full state pension closely aligned with the £12,570 personal allowance, the Chancellor emphasized the preservation of all income tax and equivalent National Insurance thresholds at their current levels for an additional three years starting in 2028.
Jason Hollands, managing director at wealth management firm Evelyn Partners, criticized the move as a significant stealth tax increase, pointing out the substantial impact on income tax and National Insurance burdens. He highlighted the shift from only one in ten taxpayers being subject to higher rate tax at the turn of the century to the current scenario where a fifth of taxpayers are paying the two highest tax rates.
The personal allowance signifies the income threshold before tax liability starts. Earnings above this trigger the basic 20% income tax rate, with the 40% rate applicable on incomes exceeding £50,270 and the 45% rate kicking in above £125,140. The National Insurance payment threshold is also set at £12,570, with an 8% contribution rate for earnings at this level and a 2% rate for incomes surpassing £50,270.
