Millions of UK workers and pensioners will be required to pay income tax this year due to a freeze on personal allowances, a policy that has been extended. The freezing of tax thresholds, in place since 2021 and now set to continue until the 2030/31 tax year, is increasingly drawing individuals into the tax system as wages rise.
HMRC estimates indicate that the number of basic-rate taxpayers will increase to 31.4 million, up from 27.4 million when the freeze was initially implemented. Fresh analysis from the Taxpayers' Alliance suggests that approximately one million more individuals will pay an average of £640 more in income tax this year compared to two years ago.
This development follows a shift in government policy regarding the £12,570 tax-free personal allowance. While there had been indications of a review to prevent more people from being taxed, these plans appear to have been abandoned. Prime Minister Andy Burnham had acknowledged hearing concerns about the personal allowance during his recent by-election campaign, suggesting the issue would be considered in the autumn budget, though he also noted the potential cost of any changes.
Fiscal drag, the effect where tax allowances and thresholds do not increase with wages, has become a significant source of revenue for the Treasury. Estimates suggest that maintaining the freeze could generate £55 billion in tax revenues by 2030. If the personal allowance had been adjusted for inflation, it would currently stand at £17,380.
The impact of the threshold freeze extends to higher earners. The Taxpayers' Alliance analysis projects that an additional 410,000 individuals will fall into the higher rate of tax as their salaries cross the £50,270 threshold. Furthermore, an extra 70,000 taxpayers are expected to be in the additional-rate bracket this year.
Pensioners have also been significantly affected. Increases to the state pension due to the triple lock mechanism are bringing many retirees' income close to or above the £12,570 personal allowance. The Taxpayers' Alliance estimates that the number of pensioners liable for income tax will rise by 630,000 to 10.2 million this year.
John O'Connell, chief executive of the Taxpayers' Alliance, criticized the policy, stating that freezing thresholds allows the government to increase revenue without explicitly raising tax rates. He urged an end to fiscal drag and the unfreezing of tax thresholds to provide relief to taxpayers.
Despite Burnham's past advocacy for wealth taxes on high earners, the Taxpayers' Alliance analysis indicates that the top one percent of income taxpayers are projected to earn 12.8 percent of total income and contribute 26.6 percent of all income tax. Geographically, London and the South East have the highest concentrations of additional and higher rate taxpayers, with a quarter of taxpayers in the capital paying the higher rate, compared to 14.4 percent in the North East.