- Income tax threshold freeze continues for 2026/27 tax year
- Freeze begun under Rishi Sunak was originally due to end this weekend...
- ...but has been extended to 2031 in a marathon tax raid from successive Chancellors
- How much the stealth tax is costing taxpayers now and what it means in the future
AJ Bell senior pensions and savings expert, Charlene Young, says:
“The taxman will be getting out the bunting to celebrate the 5th birthday of the tax raid on workers, pensioners, savers and investors. On 6 April it will be five long years since income tax thresholds were frozen at 2021 levels by then Chancellor Rishi Sunak. Since then the personal allowance of £12,570 and the higher rate threshold of £50,270 have been stuck in time with Rishi Sunak, his successor Jeremy Hunt and now Labour Chancellor Rachel Reeves conspiring to fix tax thresholds at April 2021 levels ever since. By the time thresholds rise in April 2031 the income tax system will have been in deepfreeze for a decade.
“The marathon squeeze on household finances should’ve been coming to an end in April this year. When former chancellor Rishi Sunak first unveiled operation stealth tax it was supposed to be a five-year sting ending with tax thresholds going up in April 2026.
“But, like bedraggled school children sent on a cross country run only to be dispatched on another punishing lap by their sadistic school teacher, taxpayers have seen the finishing line on the tax freeze marathon extended to 2031.
Tax threshold freeze
“Chancellor Rishi Sunak first announced the freeze to the personal allowance – the tax-free earnings limit – and the higher rate threshold at his March 2021 Budget, saying it was necessary as a step toward ‘fixing the public finances’ following the pandemic. The freeze was due to hold thresholds at April 2021 levels until 2026, but was subsequently extended to 2028 by Jeremy Hunt.
“Although she used her first Budget to commit not to extend the threshold freeze, warning it would ‘hurt working people’, an abrupt about-turn saw Rachel Reeves extend the freeze for a further three years at Budget 2025, turning what began as an unwelcome, but perhaps not unexpected, post-pandemic tax rise into a marathon ten year tax raid that will leave thresholds unchanged from April 6 2021 to April 5 2031.
Source: AJ Bell. Indexation based on previous Sept inflation/OBR forecast inflation
Source: AJ Bell. Indexation based on previous Sept inflation/OBR forecast inflation
How much will it cost taxpayers?
“The freeze could cost basic rate taxpayers up to £700.36 next year, courtesy of the tax-free personal allowance already lost since 2021.
“By the time we reach the end of the freeze in 2030/31 that figure will have risen to around £960, although the exact amount will depend on wages and inflation between now and then.
“The figures are much worse for higher rate taxpayers. Next year higher rate taxpayers will be paying as much as £3,500 in extra tax.
“By 2030/31 the higher rate threshold should be approaching £70,000 had it tracked inflation.
“One way to illustrate the impact is to consider identical salaries at the start and end of the freeze and compare the income tax bill. A £35,000 salary attracts nearly £4,500 a year in income tax with allowances frozen at 2021 levels, whereas indexed allowances would’ve brought that down to around £3,500 in 2030/31.
“Similarly, a £75,000 annual pay packet incurs £17,400 in tax. Were thresholds increased to reflect inflation, the tax bill on £75,000 of income would have dropped to around £12,600 in 2030/31.
Source: AJ Bell. Tax on annual salary in 2021/22 vs 2030/31 with and without indexed personal allowance and higher rate threshold.
Fiscal drag on your finances
“The stealth tax works by keeping thresholds frozen and allowing rising wages to drag people into paying more tax.
“For someone earning £35,000 at the start of the income tax threshold freeze they can expect to be earning around £53,000 in 2030/31 if their pay matches typical wage growth. Under a system of index linked allowanced they could expect to pay a cumulative tax bill of £59,600 during that period. But frozen tax thresholds will cost them approximately £6,500 in extra tax, taking their total tax bill over the period to more than £66,000.
Source: AJ Bell
The £50bn+ annual tax raid
”The first freeze was expected to raise an extra £8 billion a year by the current tax year, with thresholds then set to increase from next month.
“That figure has since ballooned to a forecast of over £50 billion by 2030/31 courtesy of the extended freeze, rising wages and higher inflation, as well as the cut to the additional rate threshold from £150,000 to £125,140 in April 2023.
“That staggering rise is baked in beyond the end of the freeze too, when tax thresholds will begin increasing again, but only from the lower, 2021 base.
Source: OBR
How many people are affected?
“Every single taxpayer with earnings over £12,570 is impacted by the freeze, although by exactly how much depends on your earnings.
“That includes those with salaried earnings as well as pensioners receiving taxable income in retirement. It also impacts savers with cash interest that exceeds their combined personal allowance and savings allowance, as well as investors and company directors with dividend income in excess of their personal allowance and dividend allowance – in fact those with dividend income have endured a triple whammy: frozen income tax thresholds; a reduced dividend allowance and now higher tax rates from April.
“When the tax threshold policy was first introduced the OBR estimated an extra 1.3 million people would be paying tax as a result of the policy by the time it ended. It would also push 1 million into the 40% tax bracket, the OBR forecast. It now expects the freeze to force over 6 million people into the income tax system and create 4.8 million more higher rate taxpayers by 2030/31.”
