Millions Face Higher Tax Burden as Threshold Freeze Continues
Chancellor Rachel Reeves is reportedly considering extending the freeze on personal income tax thresholds in next week's Budget, a move that new analysis from the Institute for Fiscal Studies reveals will have profound consequences for pensioners, minimum wage workers and benefit claimants.
The tax thresholds, which determine how much people can earn before paying income tax, have remained frozen since 2021 under successive governments. This policy of maintaining thresholds at £12,570 for basic rate taxpayers, £50,270 for higher rate and £125,140 for additional rate has created widespread 'fiscal drag'.
Fiscal drag occurs when tax brackets remain static while wages and prices rise with inflation, effectively pulling more people into higher tax brackets without the government explicitly raising tax rates.
State Pensioners to Pay Tax for First Time
The IFS report highlights a landmark change for pensioners: for the first time, those relying solely on the state pension will become taxpayers. While next year's state pension increase will keep it just below the £12,570 threshold, it's projected to exceed this amount in 2027.
The report states: "By 2027–28, that figure will be 100%. Unless the government grants an exemption, pensioners with low incomes will be required to begin paying tax directly to HMRC creating an additional administrative burden for millions of people."
This creates a paradoxical situation where some single pensioners receiving only the state pension could become eligible for pension credit because their after-tax income falls below the threshold, potentially creating additional costs for the government through associated benefits like free TV licences.
Minimum Wage Workers Hit Hard
The analysis reveals that minimum wage workers are increasingly seeing their pay rises offset by higher tax payments. The IFS noted that before the rapid minimum wage increases began in 2015–16, a worker needed to work 31 hours per week to start paying income tax.
If the Chancellor extends the freezes for another two years, this figure would drop to just 18 hours by 2029–30 - the lowest level since the minimum wage was introduced in 1999.
The consequence is clear: "A freeze extension would result in a full-time minimum wage worker paying £137 per year more in tax relative to current policy and £759 more than if there had been no freezes in the first place."
Universal Credit Claimants Drawn Into Tax Net
The changes also affect those receiving benefits, with the IFS reporting that 3.1 million people in families entitled to Universal Credit would become taxpayers if the freezes are extended. This represents 690,000 more than if there had been no freezes and 110,000 more than under current policy.
The Treasury has declined to comment on speculation about what will be included in the Budget, but with Prime Minister Sir Keir Starmer not dismissing the possibility of freezing income tax thresholds, millions of Britons appear set to face higher tax bills through fiscal drag.
The IFS emphasised the scale of this stealth tax: "Freezes to the thresholds at which the basic and higher rates of income tax begin to apply are alone expected to raise £39 billion a year in 2029–30."
