The Chancellor Rachel Reeves has confirmed that income tax thresholds will be frozen beyond 2028 to the 2030/31 tax year.
Freezing thresholds for a further three years will raise significant sums for the Chancellor via this ‘fiscal drag’ as wage increases pushes more people into higher tax brackets.
This Budget announcement affects the personal allowance, the basic, higher and additional tax rates, as well as the rates at which employers, employees and the self-employed pay higher NI rates. It also affects the threshold at which Inheritance Tax is charged.
Rachael Griffin, head of tax and financial planning at Quilter: “The multi‑year freeze on income tax thresholds has now been extended, locking households into one of the most powerful stealth tax rises in modern fiscal policy.
“With wages rising while thresholds stand still, millions more people will drift into higher tax bands regardless of whether their real living standards have improved. What had initially been framed as a temporary measure has now seemingly become a structural feature of the tax system and will significantly increase the tax take over the rest of the decade.
“For workers across the spectrum, the impact is sharp. Pay growth that would once have felt like genuine financial progress now pushes people into higher rates of tax far earlier than expected. Had the £12,570 personal allowance risen in line with inflation from when it was first frozen in 2021 until now, it would be worth £15,714. Had the £50,270 higher rate threshold done the same, it would be worth £62,845 today.
Lou Davey head of policy and external affairs at the Independent Governance Group (IGG) says: “The Government said it wouldn’t raise taxes for working people, but extending the freeze on income tax thresholds will have a significant impact on working savers and their pension pots.
“With take home pay effectively reducing, people will be looking for efficiencies in their own budgets, and the contributions they make to their own pensions are a likely victim of this change.”
Broadstone head of personal financial planning Rob Hillock adds: “The renewed freeze on personal allowances will drive significant tax revenues for the Chancellor but ultimately see even more workers – and indeed pensioners – tip into the tax system or onto higher rates.
“This is a significant stealth tax on households and places additional strain on working families already facing higher living costs. The quiet expansion of the tax base will feel increasingly painful for households under pressure.”
