- Chancellor extends income tax thresholds freeze to 2031
- Extending the freeze will cost individuals up to £1,292 in extra tax over the three years, compared to the freeze ending in 2028
- OBR estimate freeze, which began in 2022, will cost taxpayers £56 billion a year by 2030/31, around £1,300 per taxpayer*
- Today’s extension alone will rake in £12 billion in extra revenue by 2030/31
- Across the entire freeze 5.2 million additional people will become income tax payers
Laura Suter, director of personal finance at AJ Bell, comments:
“The chancellor has doubled down on what was once the Conservatives’ brainchild: the income tax freeze is now firmly the ‘Reeves Freeze’, extended for another three years until 2031. The result is that every taxpayer in the country will see their wages quietly eroded by higher tax bills. While not a headline tax hike, make no mistake, this is a tax raise by another name.
“It’s quite the U-turn for Reeves, who when in opposition claimed the policy was ‘picking the pocket’ of working people. It’s not going to help her lack of popularity with the voting public, but it will be intended to appease the bond markets.
“While it’s a nifty way for the government to raise money, the cumulative effect of the freeze means people are seeing their tax bills rise dramatically when compared to a system in which thresholds had increased by inflation each year. By our calculations, extending the freeze until 2031 will cost individuals up to £1,292 in extra tax over the next three years.
“The extra tax hit is bigger the more you earn, with those on £15,000 today facing an extra tax bill of £259 over the next three years – as the tax-free personal allowance of £12,570 is frozen again. This rises to an extra tax hit of £683 for someone on £45,000 and an extra tax bill of £1,293 for the highest earners.
“The damage is already clear. Since 2021, over 8.3 million people are now paying higher or additional rate tax, up by 45%, and extending the freeze will push even more working people and pensioners into higher tax bands. According to the OBR, today’s extension alone will rake in £12 billion in extra revenue by 2030/31.
“The tax freeze has dragged almost three times more people into the higher rate band than was originally expected. When the freeze was first announced in 2021, the OBR predicted it would create 1 million more higher-rate taxpayers. Today, 2.7 million more people are paying the 40% rate and the OBR now expects this to grow to 4.8 million by 2030-31. Across the entire freeze, the OBR now thinks between 2022-23 and 2030-31, 5.2 million additional individuals will become income taxpayers, while there will be 600,000 more additional rate taxpayers.
“But the cumulative effect of the entire freeze is laid bare when we compare tax bills across the whole period. If there had been no freeze, the OBR estimates that the Personal Allowance would have been £17,470 by 2030/31 and the higher rate threshold would have been a whopping £20,100 higher – standing at £70,370.
“By our own calculations, if you take Reeves’ extension to the freeze alone, the personal allowance would have stood at just over £13,353 by the 2030/31 tax year – instead it will remain stuck at £12,570. At the same time, if frozen thresholds hadn’t been extended, in 2031 you would have been able to earn £53,400 before paying the 40% tax rate – instead the actual threshold will be £3,130 less.
“Nothing can make up for the lost years where income tax bands have seen no inflationary uplift. The cumulative cost is staggering: the OBR estimate it will cost taxpayers £56 billion a year by 2029-30, around £1,330 per taxpayer on average.”
*IFS forecast: 42.1 million income tax payers based on a two-year freeze. A further one year freeze may lead to further growth in the number of income tax payers. OBR: changes to income tax covering the freezes at the basic, higher and additional rates are forecast to yield a total of £56 billion in 2030-31, of which £12 billion is from the freezes announced at this Budget
