Millions of individuals are set to face higher tax bills following Rachel Reeves’ announcement to prolong the freeze on tax thresholds. The income tax personal allowance, currently at £12,570, was scheduled to remain unchanged until April 2028. However, during today’s budget presentation, the Chancellor revealed the extension of this freeze for an additional three years.
This decision means that income tax thresholds will now be locked until the conclusion of the 2030/31 fiscal year, exceeding earlier predictions that anticipated a two-year extension. The Office for Budget Responsibility (OBR) detailed this information in documents released prior to the budget announcement.
As estimated by the OBR, the freeze on tax thresholds is expected 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.
Described as fiscal drag, the freezing of tax brackets gradually pushes more individuals into higher tax brackets as their earnings rise. It is also regarded as a stealth tax strategy employed by the government to boost tax revenue without explicitly raising tax rates.
In a subsequent 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. The full state pension is marginally below the £12,570 personal allowance, prompting the Chancellor to affirm the maintenance of all income tax and National Insurance thresholds at current levels for an additional three years from 2028. This assurance includes the exemption of basic or new state pension recipients from Simple Assessment tax obligations starting April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concerns over the substantial stealth tax increase, emphasizing the significant impact on income tax and National Insurance burdens over time. He highlighted the stark shift from only 10% of taxpayers being subject to higher-rate tax at the beginning of the century to the current scenario where a fifth of taxpayers are paying the top two tax rates.
The personal allowance signifies the threshold at which most individuals begin to pay income tax. Earnings exceeding this amount incur the basic 20% income tax rate. The higher 40% rate applies to earnings surpassing £50,270, while the additional 45% rate becomes applicable when earnings exceed £125,140.
Similarly, the threshold for commencing National Insurance contributions stands at £12,570. Individuals start paying 8% in National Insurance on earnings at this level, with an additional 2% on earnings exceeding £50,270.