Millions of employees are set to pay higher taxes as Rachel Reeves has announced an extension of the freeze on tax thresholds. The income tax personal allowance, currently at £12,570, was initially planned to be frozen until April 2028. However, in today’s budget announcement, the Chancellor revealed that this freeze will continue for an additional three years, now reaching the end of the 2030/31 financial year. This extension was longer than anticipated, with pre-budget reports suggesting a possible two-year extension.
The Office for Budget Responsibility (OBR) confirmed this development in documents released ahead of the budget. According to OBR estimates, the freeze in tax thresholds is expected to lead to an increase in the number of income taxpayers, with 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate taxpayers by 2029/30.
The freezing of tax brackets, also known as fiscal drag, will result in more individuals moving into higher tax brackets as their earnings rise over time. This mechanism is often referred to as a stealth tax, enabling the government to collect more tax without directly increasing tax rates.
In a further update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will be exempt from paying small tax amounts through Simple Assessment. The new full state pension aligns closely with the £12,570 personal allowance, prompting the Chancellor to announce the maintenance of income tax and National Insurance thresholds at their current levels for three additional years starting from 2028. This move aims to prevent basic or new state pension recipients from facing tax obligations through Simple Assessment starting April 2027.
Jason Hollands, managing director at wealth management firm Evelyn Partners, described the tax policy extension as a significant stealth tax increase. He emphasized the substantial impact this policy could have on increasing the income tax and National Insurance burdens over time, highlighting the rising number of taxpayers subject to higher tax rates compared to previous years.
The personal allowance signifies the threshold at which most individuals begin paying taxes. Earnings above this threshold are subject to the basic 20% income tax rate. Higher rates of 40% apply to earnings exceeding £50,270, while the additional 45% rate comes into effect when earnings surpass £125,140.
Similarly, the National Insurance payment threshold is currently set at £12,570. Individuals start contributing 8% in National Insurance on earnings at this level, with a 2% rate applied to earnings over £50,270.
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