UK Tax Thresholds to Rise After 2031, Offering Pay Relief
Frozen income tax thresholds, a 'stealth tax' for years, are slated to increase with inflation starting in 2031, according to Office for Budget Responsibility documents.
Income tax thresholds in the United Kingdom, which have been frozen for several years, are expected to begin rising with inflation after 2031. This policy shift, not explicitly detailed in recent budget announcements, is outlined in documents from the Office for Budget Responsibility (OBR).
The freeze on the personal allowance—the amount earned before income tax is due—and other tax rate thresholds has effectively increased the proportion of income paid in tax for many individuals. This situation has been described as a 'stealth tax' because it raises revenue without directly increasing tax rates, making it less conspicuous on pay slips.
This mechanism has served as a method for successive chancellors to generate additional funds for public services, including healthcare, education, and support for vulnerable populations. The impact of the frozen thresholds has become more pronounced in recent years due to significant wage increases driven by inflation.
If the personal allowance had kept pace with inflation over the past five years, individuals would be able to earn a higher amount before paying any income tax. Currently, the threshold is set at a level that means a portion of earnings is taxed at the basic rate. The Institute for Fiscal Studies (IFS) estimates that by 2031, over six million additional people will be brought into the income tax system as a direct result of the frozen allowance.
The IFS has calculated that if the personal allowance were unfrozen immediately, basic rate taxpayers could save up to £198 annually, while higher rate taxpayers could see savings of £395 per year. However, recent adjustments, such as a cut to National Insurance Contributions (NICs) introduced in 2024, have partially offset the increased income tax burden for some middle-income earners.
The ultimate financial benefit of unfreezing thresholds in four years will depend on the rate of wage growth at that time. The OBR documents suggest a return to indexation for these thresholds, meaning they will adjust in line with inflation. While this policy is still several years away, its scheduled end signifies a potential easing of tax pressures on income for millions of Britons.