Chancellor Rachel Reeves has confirmed that income tax thresholds will remain frozen until the 2030-31 tax year, extending a policy that began under the Conservative government and will now impact taxpayers for nearly a decade.
What Does the Tax Threshold Freeze Mean?
The freeze affects all major income tax brackets in England, Wales and Northern Ireland. The personal allowance remains at £12,570, the basic rate threshold at £50,270, and the additional rate threshold at £125,140. These levels will stay unchanged despite expected wage growth and inflation over the coming years.
This policy creates what economists call "fiscal drag" - a phenomenon where workers receiving pay rises are gradually pulled into higher tax brackets without any change to the threshold values. What might appear as a simple freeze actually represents a significant stealth tax increase for millions of Britons.
The Growing Impact on Taxpayers
The Office for Budget Responsibility projects dramatic consequences from this extended freeze. Had thresholds increased with inflation since 2021, the personal allowance would be £4,900 higher by 2030-31, while the higher-rate threshold would be £20,100 higher.
According to OBR forecasts, the proportion of taxpayers paying either higher or additional rate tax will surge from 15% in 2021-22 to 24% in 2030-31. This means nearly one in four taxpayers will find themselves in higher tax brackets by the end of the freeze period.
Investment firm Hargreaves Lansdown has calculated the specific financial impact. Someone earning £50,000 this year will pay £8,165 more in tax between 2020 and 2031 as a direct result of the threshold freeze extension.
Beyond Income Tax: The Ripple Effects
The consequences extend far beyond simple income tax calculations. Sarah Coles, head of personal finance at Hargreaves Lansdown, explains: "When you start paying higher rate tax, your personal savings allowance shrinks from £1,000 for basic rate taxpayers to £500 for higher rate taxpayers, and disappears altogether for additional rate taxpayers."
The policy also affects capital gains tax rates, which increase when taxpayers cross into higher income bands. Similarly, dividend tax rates rise as individuals move between income thresholds, creating multiple financial pressures beyond the immediate income tax burden.
For those earning above £100,000, the situation becomes particularly complex as the personal allowance reduces by £1 for every £2 earned above this threshold, completely disappearing at £125,140.
The extended freeze represents one of the most significant long-term tax policies affecting UK households, with implications that will reshape the financial landscape for millions of workers throughout the remainder of this decade.
