Millions of employees are set to face higher tax payments as Rachel Reeves has announced an extension of the freeze on tax thresholds. Originally planned to be held until April 2028, the income tax personal allowance of £12,570 will now remain frozen for an additional three years, lasting until the end of the 2030/31 financial year. This decision, revealed in advance of the Budget by the Office for Budget Responsibility (OBR), is expected to lead to an increase in the number of taxpayers across different income brackets in the coming years.
The freeze on tax thresholds, termed fiscal drag, gradually pushes individuals into higher tax brackets as their incomes rise. Described as a stealth tax, it allows the government to collect more tax without overtly raising tax rates. In a recent update, Rachel Reeves announced that individuals solely receiving the basic or new state pension will not be required to pay minor amounts of tax through Simple Assessment.
Moreover, the new full state pension is positioned just below the £12,570 personal allowance. Reeves stated that all income tax and equivalent National Insurance thresholds will be maintained at their current levels for an additional three years from 2028, ensuring pension recipients are exempted from small tax payments through Simple Assessment starting April 2027.
Jason Hollands, managing director at Evelyn Partners, expressed concerns about the significant stealth tax increase, highlighting the policy’s potential to escalate the tax burden over time. He noted a substantial shift in taxpayer numbers over the years, with a fifth of taxpayers now subject to the higher tax rates compared to one in ten at the beginning of the century.
The personal allowance serves as the threshold before income tax kicks in, with the basic rate of 20% applying once earnings exceed this limit. Higher rates of 40% and 45% are levied on incomes surpassing £50,270 and £125,140, respectively. The National Insurance payment threshold is also fixed at £12,570, with contributions starting at 8% for earnings at this level and 2% for incomes exceeding £50,270.
