A million more workers and pensioners in the United Kingdom will be required to pay income tax this year due to a freeze in tax thresholds, a policy that has been in place since 2021 and is slated to continue until the 2030-31 tax year. This freeze, combined with wage growth, has led to a phenomenon known as fiscal drag, which pulls more individuals into the tax net.
HMRC estimates indicate that the number of basic-rate taxpayers will rise to 31.4 million, an increase from 27.4 million when the freeze was first implemented. Fresh analysis by the Taxpayers' Alliance suggests that, on average, an additional one million people will pay £640 more in income tax this year compared to two years ago. The Prime Minister had previously stated an intention to review the personal allowance, currently set at £12,570, but has since appeared to backtrack on this commitment.
Prime Minister Andy Burnham acknowledged hearing "frustration over the personal allowance" during his Makerfield by-election campaign and indicated the issue would be "looked at" in the autumn budget, though he noted any change would be costly. Allies of the Prime Minister have since stated that no commitment has been made and that this issue was not part of recent cost-of-living measures. Fiscal drag has become a significant revenue source for the Treasury, with the freeze expected to generate £55 billion by 2030. Uprating the allowance to match inflation is estimated to cost approximately £9 billion. Had the personal allowance kept pace with inflation, it would currently stand at £17,380.
The impact of the frozen thresholds is also affecting higher earners. According to the Taxpayers' Alliance, an additional 410,000 individuals are expected to pay the higher rate of tax as their salaries exceed £50,270. Furthermore, an extra 70,000 individuals are projected to become additional-rate taxpayers in the current year. Pensioners are also disproportionately affected, as state pension increases under the triple lock policy push more retirees' incomes close to or above the £12,570 personal allowance. The analysis indicates that the number of pensioners liable for income tax will increase by 630,000, reaching 10.2 million this year.
John O'Connell, chief executive of the Taxpayers' Alliance, criticized the policy, stating, "Freezing thresholds lets ministers rake in billions without admitting they have raised taxes, hitting workers, pensioners and families across the country." He urged for an end to fiscal drag and the unfreezing of tax thresholds to provide relief to taxpayers.
The analysis also highlighted that while Burnham has been a proponent of wealth taxes on higher earners, the top one percent of income taxpayers are expected to earn 12.8 percent of total income and contribute 26.6 percent of 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.