Millions of workers are facing higher tax bills as Rachel Reeves has announced an extension to the freeze on tax thresholds. The initial plan to freeze the income tax personal allowance at £12,570 until April 2028 has now been extended for an additional three years, taking it through the 2030/31 financial year. This decision, revealed during the Budget, comes as a surprise as earlier reports had suggested a shorter extension period.

The Office for Budget Responsibility (OBR) confirmed this news in documents released ahead of the Budget. According to OBR estimates, the freeze in tax thresholds is expected to push 780,000 more individuals into the basic-rate tax bracket, 920,000 into the higher-rate bracket, and 4,000 into the additional-rate bracket by 2029/30.

This move, known as fiscal drag, gradually increases the number of people falling into higher tax brackets as their incomes rise, essentially acting as a stealth tax strategy. Additionally, Rachel Reeves clarified that individuals solely reliant on the basic or new state pension will not be subjected to tax payments through Simple Assessment.

The full state pension amount falls just below the £12,570 personal allowance threshold. The Chancellor emphasized the maintenance of current income tax and equivalent National Insurance thresholds for an additional three years starting from 2028, ensuring pensioners in receipt of the basic or new state pension are exempt from small tax payments through Simple Assessment from April 2027.

Jason Hollands, managing director at wealth management firm Evelyn Partners, described this as a substantial stealth income tax increase, highlighting the significant burden it places on taxpayers over time. The policy’s impact has led to a considerable rise in the number of taxpayers paying higher rate taxes compared to the beginning of the century.

The personal allowance sets the threshold for tax payments, with most individuals starting to pay the basic 20% income tax rate once earnings exceed this amount. Higher-rate tax applies to earnings above £50,270, while the additional 45% rate comes into effect for incomes over £125,140.

For National Insurance contributions, the starting threshold is also at £12,570, with an 8% contribution rate for earnings at this level and a 2% rate for incomes surpassing £50,270.