Millions of workers are set to face higher tax payments as Rachel Reeves announces an extension to the freeze on tax thresholds. The income tax personal allowance, originally scheduled to remain at £12,570 until April 2028, will now be frozen for an additional three years, taking it through the 2030/31 financial year. This decision, revealed in advance of the Budget by the Office for Budget Responsibility (OBR), is anticipated to bring about significant changes in the number of taxpayers. The OBR estimates that in 2029/30, there will be an increase of 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers due to the freeze in tax thresholds.
The concept of freezing tax brackets is known as fiscal drag, gradually pushing individuals into higher tax brackets as their incomes rise. Described as a stealth tax, it enables the government to collect more tax without officially raising tax rates. In an added update, Rachel Reeves announced 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. The Chancellor emphasized the maintenance of all income tax and equivalent National Insurance thresholds at current levels for an additional three years starting from 2028, ensuring pensioners on basic or new state pensions are not subjected to small tax payments through Simple Assessment from April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concern over the significant rise in income tax through this strategy. He highlighted the substantial impact of this policy in increasing the tax burden over time. Hollands noted the transformation from only one in ten taxpayers paying higher rate tax at the start of the century to a situation where a fifth of taxpayers are now in the higher tax brackets.
The personal allowance denotes the income threshold before tax payments commence. Earnings exceeding this limit incur a basic 20% income tax rate, with the higher 40% rate applicable on incomes surpassing £50,270 and the additional 45% rate triggered when earnings exceed £125,140.
The National Insurance payment threshold is also fixed at £12,570, with a contribution rate of 8% on income above this threshold and 2% on earnings exceeding £50,270.
