Millions of workers are set to face higher tax bills as Rachel Reeves has announced an extension of the freeze on tax thresholds. The income tax personal allowance, currently at £12,570, was originally planned to remain frozen until April 2028. However, the Chancellor’s Budget revealed that this freeze will now continue for an additional three years, until the end of the 2030/31 financial year.

This decision, disclosed in advance by the Office for Budget Responsibility (OBR), is expected to impact a significant number of taxpayers. The OBR projects that by 2029/30, there will be an increase of 780,000 basic-rate taxpayers, 920,000 higher-rate taxpayers, and 4,000 additional-rate taxpayers due to the freeze in tax thresholds.

Described as fiscal drag, the freezing of tax brackets gradually shifts more individuals into higher tax bands over time as their incomes rise. This method, also known as a stealth tax, allows the government to collect additional tax revenue without directly raising tax rates.

In a recent update, Rachel Reeves clarified 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 is marginally below the £12,570 personal allowance. The Chancellor emphasized the maintenance of income tax and National Insurance thresholds at their current levels for an additional three years starting from 2028.

Commenting on the announcement, Jason Hollands, managing director at Evelyn Partners, labeled the move as a significant stealth tax increase, emphasizing the substantial impact it will have on taxpayers over time. He highlighted the shift from one in ten taxpayers paying higher rate tax at the turn of the century to the current scenario where a fifth of taxpayers are subject to the highest tax rates.

The personal allowance, which denotes the threshold before tax payment kicks in, stands at £12,570. Earnings above this amount incur a basic 20% income tax rate. The higher 40% rate applies to earnings exceeding £50,270, while the additional 45% rate is triggered when earnings surpass £125,140.

For National Insurance contributions, the threshold for payment initiation is also set at £12,570. Individuals pay 8% on earnings from this threshold, with a 2% rate applied on earnings over £50,270.