Millions of workers are set to face higher tax payments as Rachel Reeves announced an extension of the freeze on tax thresholds. Originally planned to remain unchanged until April 2028, the income tax personal allowance of £12,570 will now be frozen for an additional three years, lasting until the end of the 2030/31 financial year. This decision, revealed in advance documents from the Office for Budget Responsibility, goes beyond earlier expectations of a two-year extension.
The freeze in tax thresholds is predicted by the OBR to lead to 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income taxpayers by 2029/30. This move, known as fiscal drag, pulls more individuals into higher tax brackets as their incomes rise gradually. Described as a stealth tax, it allows the government to collect more tax without officially increasing tax rates.
In an additional update, Rachel Reeves stated that individuals solely receiving the basic or new state pension will be exempt from paying small amounts of tax through Simple Assessment. The full state pension amount is marginally below the £12,570 personal allowance. Reeves affirmed the maintenance of all income tax and equivalent National Insurance thresholds at their current levels for three more years from 2028, ensuring pensioners in this category are not subjected to minor tax payments through Simple Assessment starting April 2027.
Commenting on this development, Jason Hollands, managing director at wealth management firm Evelyn Partners, criticized the policy as a significant stealth tax hike. He highlighted the substantial impact of this policy in escalating the income tax and National Insurance burden over time, with a notable increase in the number of taxpayers paying higher tax rates.
The personal allowance signifies the threshold before individuals start paying tax, with earnings above this amount subject to the basic 20% income tax rate. The higher 40% rate applies to income surpassing £50,270, while the additional 45% rate activates for earnings exceeding £125,140. The National Insurance payment threshold is also fixed at £12,570, with an 8% contribution rate for earnings at this level and a 2% rate for incomes exceeding £50,270.
