Income tax thresholds have been frozen until April 2031, dragging millions more households into the tax system or driving them up into higher tax bands.
The Office for Budget Responsibility (OBR) forecasts that previously announced freezes and the extensions at this Budget mean that between 2022-23 and 2030-31, 5.2 million additional individuals will have been brought into paying income tax.
Furthermore, some 4.8 million more will have moved to the higher rate and 600,000 more onto the additional rate.
And, compared to the fiscal watchdog’s March forecast – when freezes were due to end from April 2028 – the OBR estimates that these numbers are 780,000, 920,000, and 4,000 higher respectively in 2029-30.
This, it says, is largely a result of the extensions announced in this year’s Budget.
Overall, the freezes have led to the forecast proportion of taxpayers being at either the higher or additional rate increasing from 15% in 2021-22 to 24% in 2030-31. The OBR says it expects workers to respond by demanding wage increases.
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Announcing the decision, Rachel Reeves said: “To break the cycle of austerity, we need a fair and sustainable tax system; one that generates revenues to fund the public services that we all use and supports investment to grow our economy. That does mean that today I’m asking everyone to make a contribution.”
Reeves’ Budget raises taxes by £26bn in 2029-30 through freezing personal tax thresholds and a host of smaller measures, including increasing taxes on income earned from property, savings and dividends.
This, says the OBR, brings the tax take to an all-time high of 38% of GDP in 2030-31.
The net impact of Budget spending and tax policies increases borrowing by £5bn on average over the next three years, but then reduces it by £13bn on average in the following two years.
Freezes raise billions in tax receipts
The income tax personal allowance, the higher-rate threshold and additional-rate thresholds are frozen at £12,570, £50,270 and £125,140 respectively until 2030-31.
According to RBC Wealth Management, if the basic tax-free allowance threshold rose in line with inflation, the personal allowance for income tax would be now nearer to £16,500 instead of £12,570.
It estimates this will leave UK taxpayers £802.72 per year worse off.
Meanwhile, the NICs secondary threshold is frozen until 2030-31.
This threshold was reduced from £9,100 to £5,000 as part of the changes to employer National Insurance contributions (NICs) announced in last year’s Budget.
The OBR expects the freezes to all three personal tax thresholds to raise £8.3bn in 2029- 30. It added: “We expect workers to shift part of the incidence of the tax increase onto employers, by bargaining for a higher nominal wage.”
Andrea Tarasheva, wealth planner at RBC Wealth Management, said: “Tax freezes combined with wage inflation will push those with rising incomes into tax brackets they would previously not have reached.
“This is known as fiscal drag to economists and is essentially a ‘hidden’ tax rise. This can have a huge impact on household incomes as more people are ‘dragged’ into paying [a] larger amount of tax on their personal income.
“People might wish to consider making use of vehicles that offer income tax relief such as pension contributions and private investments such as Enterprise Investment Schemes (EISs) and venture capital trusts (VCTs). However, it’s important to discuss this with a qualified adviser to ensure this is a suitable strategy for each your personal circumstances and objectives and be aware that these structures are high risk and impacted by other forms of tax.”
