Millions of people are facing higher bills as a result of a ‘stealth tax’ with one expert saying ‘HMRC will be getting out the bunting to celebrate’
Analysis indicates basic-rate taxpayers could be paying up to £700.36 more(Image: Thana Prasongsin via Getty Images)
Millions of employees, pensioners and savers are facing an escalating “stealth tax” of £700 in the coming financial year, it was warned today.
The personal allowance before people begin paying income tax has remained fixed at £12,570, while the higher-rate threshold stands at £50,270. Had these figures increased in line with inflation, the threshold for paying the basic rate tax of 20% would be approximately £18,500 today.
Meanwhile, the threshold for paying higher rate tax at 40% would now be roughly £70,000. The prolonged freeze on tax bands was initially introduced under the Conservatives in 2021, but has now been extended through to 2031 by Labour.
Charlene Young, senior pensions and savings expert at AJ Bell, described the policy as an extended “tax raid” impacting virtually every taxpayer. She said: “The taxman will be getting out the bunting to celebrate the 5th birthday of the tax raid on workers, pensioners, savers and investors.”
£700 blow – and climbing
Analysis indicates basic-rate taxpayers could be paying up to £700.36 more in tax during 2026/27 because of the frozen personal allowance. By the conclusion of the freeze in 2030/31, that additional burden is projected to climb to around £960, subject to wage growth and inflation.
The consequences are considerably more severe for higher earners, with higher-rate taxpayers facing up to £3,500 more next year as a result of the freeze.
How the system operates
The approach depends on what’s known as “fiscal drag”, whereby thresholds remain static while earnings increase. This results in more people being drawn into the tax net and current taxpayers being pushed into higher brackets.
For instance:
- A wage of £35,000 could incur nearly £4,500 in tax under frozen thresholds, compared with approximately £3,500 if allowances had increased with inflation.
- A £75,000 wage sees tax of about £17,400, versus roughly £12,600 if the threshold had risen annually under an indexed arrangement.
£50bn-a-year revenue collection
What started as a relatively modest income generator has expanded dramatically. Originally, the threshold freeze, brought in by the then Conservative chancellor Rishi Sunak, was projected to raise £8bn yearly. It’s now forecast to generate over £50bn annually by 2030/31.
The rise reflects a combination of higher salaries, inflation and policy shifts, including the lowering of the additional-rate threshold, where the tax rate climbs to 45%, to £125,140.
Millions pulled into taxation
The number of people affected has soared well beyond initial projections. Latest estimates indicate more than 6 million additional people will be paying income tax by 2030/31.
Simultaneously, around 4.8 million more will be forced into the higher-rate bracket.
Who is impacted?
The freeze affects anyone earning above the £12,570 personal allowance, including:
- Employees
- Pensioners with taxable income
- Savers earning interest above allowances
- Investors and company directors receiving dividends
Dividend investors have been particularly hard hit, contending with a combination of frozen thresholds, reduced allowances and steeper tax rates.
A 10-year squeeze
The freeze was initially brought in by Rishi Sunak in March 2021 as a short-term measure to restore public finances following the pandemic. It was subsequently extended by Jeremy Hunt and then pushed further out to 2031 by Rachel Reeves, despite earlier suggestions that the policy would not be prolonged.
This means income tax thresholds will remain fixed at 2021 levels for an entire decade, cementing a prolonged rise in the overall tax burden without any increases to headline rates.
