As the UK government prepares for the Autumn Budget on November 26, attention is turning to Chancellor Rachel Reeves’ decision to extend the freeze on income tax thresholds. Initially introduced by the Conservative government in 2021, the freeze has now been embraced by Labour, with the potential for it to last beyond 2028.
A Stealth Tax Mechanism
The income tax bands, which determine how much tax an individual pays on their earnings, have been frozen since 2021. These bands have not been adjusted to reflect rising inflation, meaning that while wages are rising, individuals find themselves paying more tax because they fall into higher tax brackets.
Under the current structure, the Personal Allowance (the amount that can be earned before paying income tax) remains fixed at £12,570, while the threshold for the higher-rate tax band is set at £50,270. According to Laura Suter, Head of Personal Finance at AJ Bell, had the bands been updated in line with inflation, the Personal Allowance would now be closer to £15,550, and the higher-rate threshold would be nearing £62,200.
This freeze, which is due to last until 2028, is a deliberate measure by the government to increase revenue without raising the income tax rates themselves. However, critics have labelled it a “stealth” tax, as it forces workers to pay more without any direct tax rate increase. For example, someone earning £50,000 at the start of the freeze in 2021 could face an additional £14,831 in tax payments by the time the freeze ends in 2028, simply because their wages have risen while the tax bands have remained static.
Financial Strain Without Clear Recognition
The freeze on income tax thresholds has already placed a significant financial burden on many households. According to financial experts, the freeze amounts to a slow, hidden tax hike, with workers often unaware of the extra tax they are paying. This phenomenon, which has been ongoing for several years, can be especially challenging for middle-income earners who may have been expecting their tax obligations to remain stable or even decrease as inflation-adjusted rises were anticipated.
The issue is compounded by the current economic climate, with high inflation rates in recent years pushing wages higher in many sectors. However, without corresponding increases to the tax bands, the result is that more workers are paying tax at higher rates than they would have otherwise. The freeze is particularly significant for those at the threshold of tax brackets, where small increases in income could trigger disproportionately large increases in tax payments.
If Chancellor Reeves decides to extend the freeze beyond 2028, as some experts expect, the situation could worsen for millions of workers. While the freeze is a significant part of the government’s fiscal strategy to address a £50 billion hole in the public finances, it represents a complex and often hidden way of raising revenue. For many, it means higher tax bills without any clear recognition of a formal increase, making it harder to adjust personal finances and plan for the future.
