UK Stealth Tax Freeze to Generate £71 Billion, Draining Millions of Workers
Economists predict that frozen income tax thresholds will pull an additional 13 million workers into higher tax brackets by 2030-31, yielding billions for the treasury.
Frozen income tax thresholds are projected to generate an additional £71 billion for the UK Treasury by the 2030-31 fiscal year, according to economic analysis. This measure, often referred to as 'fiscal drag,' will draw an estimated 6.75 million more individuals into paying income tax and an additional 6.03 million into higher and additional tax rates compared to a scenario where thresholds rise with inflation.
The freeze on income tax thresholds, initially implemented in the 2021-22 fiscal year, was extended by former Chancellor Rachel Reeves to remain in place until 2030-31. This policy means that as wages increase, more of individuals' earnings are subject to taxation, even if their real income hasn't significantly improved.
Analysis from the Institute for Fiscal Studies (IFS), based on Office for Budget Responsibility (OBR) figures, indicates the substantial revenue increase from this frozen threshold policy. The IFS stated that by 2030-31, without inflation adjustments since 2021-22, the personal allowance would be £4,900 higher, and the threshold for the higher tax rate would be £20,100 higher.
Critics, such as Conservative Treasury spokesman Gareth Davies, have accused the Labour government of a 'stealth tax' on working people. Davies argued that the policy increases the tax burden to record levels, suggesting the government is prioritizing revenue generation over addressing welfare costs and the rising cost of living for families.
Treasury sources, however, maintain that the funds are being raised in a targeted manner, distinct from broad increases in income tax rates. The OBR projects that the proportion of taxpayers paying the higher or additional rate will rise from 15% in 2021-22 to 24% by 2030-31 due to these freezes.
The impact of frozen thresholds disproportionately affects lower and middle-income earners. For a basic rate taxpayer, the equivalent tax increase is estimated to be 4%. Analysis by AJ Bell suggests that by 2031, basic rate taxpayers could pay around £960 more in taxes than they would have if thresholds had kept pace with inflation. Higher rate taxpayers face even more significant increases, potentially paying as much as £3,500 in extra taxes by next year.
Historically, income tax thresholds were typically adjusted annually for inflation. The shift began in 2021 when then-Chancellor Rishi Sunak announced a freeze from April 2022 until 2026, a policy that has since been extended. Although not explicitly mentioned in Chancellor John Healey's recent Budget, official documents confirm the continuation of the freeze until 2031.