The Chancellor has announced that income tax thresholds will be frozen until the 2030-31 tax year.
The Conservative Government first introduced the thresholds freeze in 2021, with the freeze expected to last until 2028.
However, Rachel Reeves has extended the freeze for a further three years as she seeks to plug a multi-billion pound black hole in government finances.
Based on estimates from the Office for Budget Responsibility, extending the freeze until 2031 will result in 780,000 more basic-rate, 920,000 more higher rate and 4,000 more additional-rate income taxpayers in 2029/30.
Mike Ambery, retirement savings director at Standard Life, said: “The Government’s decision to extend the freeze on income tax thresholds until 2031 represents one of the most significant stealth tax rises in recent years. Originally introduced as a temporary measure, the freeze – combined with wage growth and inflation – will steadily push more earners into higher tax bands, reducing take-home pay and increasing the importance of tax-efficient saving.”
Rachael Griffin, tax and financial planning expert at Quilter, said: “With wages rising while thresholds stand still, millions more people will drift into higher tax bands regardless of whether their real living standards have improved. What had initially been framed as a temporary measure has now seemingly become a structural feature of the tax system and will significantly increase the tax take over the rest of the decade.”
The cumulative effect of the freeze means people are seeing their tax bills rise significantly. Calculations by AJ Bell project that the freeze will cost individuals up to £1,292 in extra tax over the next three years.
The tax freeze has also dragged almost three times more people into the higher rate band than was originally expected.
When the freeze was first announced in 2021, the OBR predicted it would create one million more higher-rate taxpayers. Today, 2.7 million more people are paying the 40% rate and the OBR now expects this to grow 4.8 million by 2030-31.
Laura Suter, director of personal finance at AJ Bell, said: “The result is that every taxpayer in the country will see their wages quietly eroded by higher tax bills. While not a headline tax hike, make no mistake, this is a tax raise by another name.
“It’s quite the U-turn for Reeves, who when in opposition claimed the policy was ‘picking the pocket’ of working people. It’s not going to help her lack of popularity with the voting public, but it will be intended to appease the bond markets.”
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