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 remain stagnant until April 2028, the income tax personal allowance of £12,570 will now be frozen for an additional three years, lasting until the conclusion of the 2030/31 financial year. This decision, revealed in advance documents by the Office for Budget Responsibility (OBR), surpasses earlier expectations of a two-year extension.
The OBR forecasts that this tax threshold freeze will lead to an increase of 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers in the 2029/30 tax year. This policy, known as fiscal drag, gradually moves individuals into higher tax brackets as their incomes rise. It operates as a subtle tax hike, enabling the government to collect more revenue without adjusting tax rates.
In a recent update, Rachel Reeves assured that individuals solely reliant on the basic or new state pension will be exempt from paying small tax amounts through Simple Assessment. With the full state pension nearing the £12,570 personal allowance, the Chancellor has committed to maintaining income tax and National Insurance thresholds at their current levels until 2028, ensuring pensioners in receipt of these benefits are not burdened with additional taxes starting from April 2027.
Jason Hollands, the managing director at wealth management firm Evelyn Partners, criticized the tax policy as a substantial stealth tax increase, emphasizing the escalating tax burden faced by taxpayers over the years. He highlighted the significant rise in taxpayers subject to higher tax rates, with now one-fifth of taxpayers paying the top two tax rates.
The personal allowance signifies the threshold at which most individuals begin paying income tax. Earnings above this limit are subject to the basic 20% income tax rate, while the higher 40% rate applies to income exceeding £50,270. Additionally, the 45% additional rate is enforced on earnings surpassing £125,140.
For National Insurance contributions, the threshold for payment initiation is also established at £12,570. Individuals start contributing 8% of their income once it exceeds this amount, with a 2% rate applied to earnings surpassing £50,270.