Chancellor Rachel Reeves has extended the freeze on income tax thresholds until the 2030-31 tax year, a move that will drag more people into higher tax bands through fiscal drag. The freeze, originally introduced by Rishi Sunak in 2021 and extended by the previous Conservative government, means thresholds will not rise with inflation for nearly a decade.
Under the current system, the personal allowance remains at £12,570, with the basic rate (20%) applying to income between £12,571 and £50,270, the higher rate (40%) to £50,271–£125,140, and the additional rate (45%) above that. Those earning over £100,000 lose £1 of personal allowance for every £2 earned above that threshold, losing it entirely at £125,140.
The Office for Budget Responsibility (OBR) estimates that if thresholds had risen with CPI inflation since 2021, the personal allowance would be £4,900 higher by 2030-31, and the higher-rate threshold £20,100 higher. As a result, the proportion of taxpayers paying higher or additional rate tax is projected to rise from 15% in 2021-22 to 24% in 2030-31.
Hargreaves Lansdown calculates that someone earning £50,000 this year will pay £8,165 more in tax between 2020 and 2031 due to the freeze. Sarah Coles, head of personal finance at the firm, notes that crossing into higher-rate tax also reduces the personal savings allowance from £1,000 to £500, and increases capital gains and dividend tax rates, affecting savers and investors.
