UK Tax Thresholds Frozen Until 2031, Raising Billions Through 'Fiscal Drag'
Millions of workers and pensioners face increased tax burdens as income tax thresholds remain unchanged, with estimates suggesting a £55 billion annual revenue boost for the Treasury by 2030.
Income tax thresholds in the United Kingdom will remain frozen until 2031, a policy decision expected to significantly increase the tax burden on millions of workers and pensioners. This continued freeze, initially implemented by former Prime Minister Rishi Sunak and extended by Rachel Reeves, is projected to generate substantial revenue for the Treasury through a mechanism known as fiscal drag.
As wages and inflation continue to rise, frozen thresholds mean that more lower earners will be brought into the tax system, and an increasing number of taxpayers will be pushed into higher tax brackets. Recent estimates from the Office for Budget Responsibility suggest this policy could yield over £55 billion annually by 2030.
If the personal allowance, currently set at £12,570, had been increased in line with inflation since 2021, it would have risen to approximately £16,080. By 2030-31, based on inflation estimates, it could have reached £17,680. For an individual earning £25,000 annually, this freeze could result in paying an additional £700 in income tax this year, potentially rising to £5,900 by 2030 if their salary keeps pace with inflation.
The threshold for the higher tax rate, currently £50,270, would have been £64,480 if it had kept pace with inflation. By 2030, it could have reached £71,080. Someone earning £50,000, already near this threshold, could see their tax liability increase by £8,100 by 2030 due to being pulled into the higher tax band.
Further up the income scale, the threshold for the additional rate of income tax was reduced by Chancellor Jeremy Hunt from £150,000 to £125,140 in April 2023. Had this threshold increased with inflation, it would currently be £132,160 and projected to reach £135,360 by 2030-31. This compounding effect of fiscal drag has already moved millions into higher tax brackets, leading to thousands of pounds in additional annual tax payments.
The freeze also impacts pensioners. As the state pension increases, more retirees are finding themselves liable for income tax because the personal allowance remains static. From next year, the full state pension is expected to exceed £13,000.
Chancellor John Healey has indicated plans to raise the income tax threshold for the poorest pensioners to £13,036, aligning it with the full new state pension rate from next April. This measure is intended to prevent those solely relying on the state pension from paying income tax on it for the first time, as the current threshold of £12,570 would be breached. However, concerns have been raised that this adjustment might only benefit those under 75 receiving the new state pension, potentially excluding older pensioners on the pre-2016 system and creating a 'two-tier' system.
Research by the Institute for Fiscal Studies (IFS) in August found that the personal allowance would be £3,500 higher today if it had been increased in line with inflation since April 2021. By 2030-31, the gap is projected to reach £4,870, representing a significant real-terms reduction in its value.