Millions Face Higher Taxes as UK Freezes Income Thresholds

Millions of UK workers are being drawn into paying more income tax as personal income thresholds remain frozen, a policy expected to generate an additional £71 billion for the Treasury by the 2030-31 fiscal year. Economists predict that nearly seven million more individuals will be subject to income tax than if thresholds had kept pace with inflation since the freeze began five years ago.

Furthermore, an estimated six million more people are projected to be pushed into higher and additional tax rate brackets as a consequence of this measure. Analysis by the Institute for Fiscal Studies (IFS), using Office for Budget Responsibility (OBR) figures, indicates that by 2030-31, the freeze will result in an additional £71 billion in tax revenue. The IFS stated that relative to thresholds rising with inflation since 2021-22, the OBR forecasts an additional 6.75 million people paying income tax, and an additional 6.03 million individuals moving into higher tax rate categories.

The current freeze on income tax thresholds began in the 2021-22 tax year. It was initially announced by former Chancellor Rachel Reeves to last until 2030-31. Although Chancellor John Healey did not alter this policy in his recent Budget, the freeze is set to continue until 2031, meaning that as wages increase, more individuals will pay a larger portion of their earnings in tax.

This situation, known as 'fiscal drag,' occurs when pay raises push individuals into higher tax bands without an increase in the thresholds themselves. Until 2021, these thresholds were generally adjusted annually in line with inflation. The freeze implemented by then-chancellor Rishi Sunak in 2021 was intended to last until 2026 but has since been extended.

For basic rate taxpayers, the impact of the freeze between 2021 and next year is estimated to be an additional £700 in tax compared to a scenario where thresholds rose with inflation. By 2031, this figure is expected to climb to approximately £960. Higher rate taxpayers face a more significant impact, potentially paying as much as £3,500 in extra tax by next year.

The OBR has calculated that if the personal allowance had increased with inflation from 2021 to 2030-31, it would be £4,900 higher. Similarly, the threshold for the higher tax rate would be £20,100 higher. Consequently, the proportion of taxpayers paying the higher or additional rate is forecast to increase from 15% in 2021-22 to 24% in 2030-31.

Conservative Treasury spokesman Gareth Davies accused Labour of 'hiking taxes by stealth,' arguing that the party is making more people pay more tax while families are contending with rising living costs. Treasury sources, however, maintained that funds are being raised in a 'targeted way rather than putting up the big taxes on people's earnings.'