Millions of employees are set to see an increase in their tax payments following an announcement by Rachel Reeves to prolong the freeze on tax thresholds. Originally planned to stay stagnant until April 2028, the income tax personal allowance of £12,570 will now remain unchanged for an additional three years as revealed during the Budget announcement.
According to the Office for Budget Responsibility (OBR), the freeze in tax thresholds is estimated to lead to 780,000 more individuals becoming basic-rate taxpayers, along with 920,000 more being categorized as higher-rate taxpayers, and an additional 4,000 falling into the additional-rate tax bracket by 2029/30.
Described as fiscal drag, the freezing of tax brackets results in more individuals being pushed into higher tax brackets over time due to wage increases. This tactic, often termed a stealth tax, allows the government to collect more tax without explicitly raising tax rates.
In a recent update, Rachel Reeves assured that individuals solely receiving the basic or new state pension will not be subjected to small tax payments through Simple Assessment. The new full state pension is marginally below the £12,570 personal allowance, prompting the Chancellor to affirm the maintenance of all income tax and equivalent National Insurance thresholds at their current levels for an additional three years from 2028.
Jason Hollands, managing director at wealth management firm Evelyn Partners, expressed concerns over the significant rise in income tax through this stealth approach. He highlighted the substantial impact of this policy in escalating the income tax and National Insurance burden over the years, emphasizing that a fifth of taxpayers are now paying the two highest tax rates, compared to only one in ten at the beginning of the century.
The personal allowance signifies the threshold before income tax becomes applicable, with the basic 20% rate activated upon surpassing this amount. Earnings exceeding £50,270 trigger the higher 40% rate, while earnings surpassing £125,140 prompt the additional 45% rate.
Moreover, the National Insurance payment threshold is aligned with the £12,570 personal allowance, with an 8% contribution on earnings from this point and a 2% contribution on earnings exceeding £50,270.