Millions of employees are set to face increased tax payments as Rachel Reeves announced an extension of the freeze on tax thresholds. Originally planned to remain stagnant until April 2028, the income tax personal allowance of £12,570 will now be held steady for an additional three years, running through the 2030/31 financial year. This decision, which surpasses previous expectations, was revealed in documents released by the Office for Budget Responsibility (OBR).
According to OBR projections, the prolonged freeze on tax thresholds is anticipated to lead to an additional 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers by 2029/30.
This strategy, known as fiscal drag, pulls more individuals into higher tax brackets over time as their incomes increase. It is also recognized as a stealth tax, allowing the government to collect more tax without explicitly raising tax rates.
In a recent update, Rachel Reeves assured that individuals solely receiving the basic or new state pension would be exempt from paying small tax amounts through Simple Assessment. The Chancellor emphasized the maintenance of all income tax and equivalent National Insurance thresholds at current levels for an extra three years starting in 2028, with a specific exemption for basic or new state pension recipients from April 2027.
Jason Hollands, managing director at Evelyn Partners, described this move as a significant stealth tax increase, emphasizing its potential to escalate the income tax and National Insurance burden significantly over time. He highlighted the shift in taxpayer demographics, noting that now one-fifth of taxpayers are subject to the two highest tax rates, compared to just one in ten at the beginning of the century.
The personal allowance dictates the earnings threshold before income tax is levied, with the basic 20% rate applied beyond this threshold. Higher tax rates of 40% and 45% are triggered at earnings surpassing £50,270 and £125,140, respectively. National Insurance contributions commence at the £12,570 threshold, with an 8% rate applied initially and a 2% rate on earnings exceeding £50,270.