Chancellor Rachel Reeves is set to deliver her highly anticipated Autumn Budget on November 26, with speculation mounting over potential changes to income tax and national insurance that could affect millions of British workers.
What's on the table for income tax and national insurance?
During the election campaign, Labour made a firm manifesto pledge not to increase VAT, national insurance, or income tax for working people. Initial reports suggested the government was considering a controversial move to break this promise by increasing income tax by 2p while cutting national insurance contributions.
However, recent developments indicate these plans have been abandoned following concerns about voter backlash and pressure from MPs. The government has also received better-than-expected economic forecasts, reducing the immediate pressure for such dramatic tax changes. The last basic rate income tax increase in the UK occurred back in 1975.
Despite this, Sir Keir Starmer refused to rule out extending the current freeze on income tax thresholds for another two years during a Wednesday appearance. This strategy, often described as a stealth tax, effectively drags more people into higher tax brackets as their wages increase with inflation.
How income tax works and the impact of frozen thresholds
Most people in the UK can earn £12,570 each tax year before they start paying income tax. This personal allowance has remained frozen since the 2021/22 tax year.
The current income tax bands work as follows:
- Personal allowance: Up to £12,570 (0% tax)
- Basic rate: £12,571 to £50,270 (taxed at 20%)
- Higher rate: £50,271 to £125,140 (taxed at 40%)
- Additional rate: Over £125,140 (taxed at 45%)
Tax thresholds are already frozen until the 2028/29 tax year, but new reports suggest this freeze could be extended by another two years to 2030. According to estimates from the Institute for Fiscal Studies, extending the freeze would generate approximately £8.3 billion annually by the end of the decade.
This process, known as fiscal drag, means that as wages rise with inflation, more people are pulled into paying tax for the first time or pushed into higher tax brackets, increasing the government's tax revenue without officially raising tax rates.
Sarah Coles, head of personal finance at Hargreaves Lansdown, explained: "Fiscal drag has hauled over six million more people into paying income tax, and 3.36 million more into paying higher or additional rate tax."
"We've had to hand over an extra £89 billion in income tax this year compared to 2021/22 as a result. The Institute for Fiscal Studies says a freeze for another two years would mean that by 2030, one in four people will pay higher rate tax."
Coles added that someone earning £60,000 could pay an additional £1,529 by the end of 2029/30 if thresholds remain frozen instead of increasing with wages (assuming 4% annual wage growth).
Practical ways to reduce your tax bill
Despite potential tax changes, there are legitimate strategies to minimise your tax burden. Sarah Coles recommends exploring whether your employer offers salary sacrifice schemes.
Salary sacrifice involves agreeing to give up part of your pre-tax salary in exchange for non-cash benefits such as pension contributions or childcare vouchers. This reduces the portion of your pay subject to income tax, and in some cases, might actually increase your take-home pay.
"In some cases, the government will let you give up a portion of your salary, and spend it on certain things free of tax and in some cases National Insurance. This includes pensions," Coles explained.
Married couples might also benefit from the marriage tax allowance if one spouse is a non-taxpayer and the other is a basic rate taxpayer. "The marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse, to cut their tax bill," Coles noted.
As the November 26 Budget announcement approaches, millions of UK taxpayers will be watching closely to see how these potential changes might affect their financial situation in the coming years.
