While Chancellor Rachel Reeves asserts she hasn't raised taxes for working people, a hidden financial phenomenon is quietly draining British wallets. The extension of frozen tax thresholds in Wednesday's Budget means millions will pay significantly more income tax without any official rate increases.
The Mechanics of Fiscal Drag
This stealth tax strategy began in 2021 when the Conservative party first froze the levels at which people start paying basic and higher rate income tax. The current government has now extended this freeze from 2028 to 2031, ensuring the Treasury benefits from wage inflation dragging more earners into higher tax brackets.
The personal allowance remains stuck at £12,570 where it's been since 2021, while the higher rate threshold stays frozen at £50,270. As wages increase with inflation, more people cross these stagnant boundaries, automatically paying more tax.
The Financial Impact on Households
According to the Office for Budget Responsibility, this extended freeze will generate £12 billion for the Treasury by 2031 while costing the average person approximately £1,330 annually by 2029.
Laura Suter, director of personal finance at AJ Bell, notes the dramatic effect: "The tax freeze has dragged almost three times more people into the higher rate band than was originally expected." The OBR initially predicted one million additional higher-rate taxpayers, but there are now 2.7 million more people paying the 40% rate, with projections reaching 4.8 million by 2030-31.
The impact varies by income level:
- Someone earning £15,000: £259 extra tax over three years
- Someone earning £45,000: £683 additional tax burden
- Highest earners: £1,293 in extra payments
Broader Consequences Beyond Income Tax
Crossing the frozen £50,270 threshold triggers multiple financial consequences beyond the higher income tax rate. Your personal savings allowance shrinks from £1,000 to £500, and you face increased rates on dividend and capital gains tax.
For families, reaching this earnings level activates the High Income Child Benefit Charge, potentially wiping out their entire benefit. With this threshold also frozen, ordinary pay rises are pushing more parents over the line each year.
Rachael Griffin of Quilter explains: "Pay growth that would once have felt like genuine financial progress now pushes people into higher rates of tax far earlier than expected."
If thresholds had increased with inflation since 2021, the personal allowance would now be approximately £15,550 rather than £12,570, and the higher rate threshold would stand around £62,189 instead of £50,270.
Financial experts suggest using salary sacrifice schemes or increasing pension contributions to reduce taxable income for those approaching these thresholds. However, the fundamental issue remains: the government is collecting more revenue without technically changing tax rates, creating what Griffin describes as a "cost in transparency" that leaves households feeling the squeeze without understanding its origin.
