Chancellor John Healey has defended the continued freeze on income tax thresholds, telling Martin Lewis that "bigger changes" could be on the way, after being accused of raising taxes on working people by stealth.
The thresholds have been frozen since 2021 and, under current plans, will remain so until 2031. This has led to a phenomenon known as "fiscal drag", where more of workers' income crosses frozen boundaries, meaning even the lowest paid are paying more tax.
Personal Allowance and Tax Rates
The basic Personal Allowance in the UK is £12,570 for the 2026/27 tax year, the amount you can earn annually before paying 20 per cent income tax. The higher 40% rate kicks in at £50,271 and the additional 45% rate at £125,140. Independent data suggests a basic-rate earner (£20k–£50k) pays roughly £700 to £800 more tax per year purely due to the freeze.
Mr Healey did not make any changes to the allowances in this week's Budget, but he did tell ITV viewers there were potential "bigger changes" on the way.
Martin Lewis Challenges the Chancellor
On his ITV show, Mr Lewis read out a question from viewer Michael: "Will the chancellor be honest and admit he's raising taxes on working people by stealth by continuing the freeze on tax thresholds? He is being totally disingenuous."
Martin asked: "When will you raise tax thresholds?" Mr Healey said: "Well, our promise was not to raise rates across the board and this was a budget unlike in some previous years where I rejected the idea of broad-based tax rises because it isn't just businesses, it's individuals and households that are under pressure.
"So where I could avoid that, I decided I should do that. Uh and it was a budget, if you step back, that was designed to take action where we could just to help take a bit of pressure off people, give people a bit of breathing space, which we've done, especially on energy. And it was a budget also designed to try and do that a bit for business."
But Martin took issue on the working people taxes - and said fiscal drag was doing exactly that: "Forgive me, this specific question. You said in the speech yesterday, we are not raising taxes on working people. Well, by all definitions, the fiscal drag, the freezing of the tax thresholds is the biggest tax that has ever been raised in recent history. You accept you are while you're not be raising tax rates, you are increasing taxes."
Impact of the Freeze
Mr Healey said: "In truth, it is part of any government's revenue and judgments about thresholds as well as rates are part of the judgments that have to be taken and the plans for the thresholds were have been set for the next few years. And I took the decision in this budget that I wouldn't touch those and I would do what I can where I could to help people. And then make some bigger changes for the long term. Because fundamentally we've got parts of our system that needs fixing."
Fiscal drag occurs when the government freezes tax thresholds while inflation and nominal wages rise. Instead of explicitly raising tax rates, the Treasury captures more revenue because a larger share of worker incomes crosses the frozen boundaries.
According to the most recent HMRC data, there are 31.4 million basic-rate taxpayers across the country. That represents a 15% rise in the number of people paying income tax at 20% since tax bands were frozen at 2021 levels.
A total of 7.7 million individuals are anticipated to pay the higher rate this year - an increase of a million compared to two years ago. An additional 1.3 million people are projected to pay the 45% additional rate - substantially more than the 263,000 people paying it in 2010-11 when it was initially introduced.
Had the threshold increased in line with inflation, it would stand at approximately £16,072 next year and £17,380 by 2029-30, according to analysis by AJ Bell. Should the personal allowance be raised to £16,000, it would cost around £35bn, the investment platform stated. Increasing the allowance by merely £100 would cost roughly £1bn annually.
