Millions of UK households are facing a significant increase in their tax bills due to a prolonged freeze on income tax thresholds, a policy experts are labelling a 'stealth tax'.
The Mechanics of Fiscal Drag
The central pillar of this policy is the freeze on the tax-free personal allowance, which has been held at £12,570 since 2021. This level is now scheduled to remain unchanged until at least 2028. Similarly, the thresholds for the basic, higher, and additional income tax rates—£12,571, £50,271, and £125,140 respectively—are also frozen.
This freeze, which began in April 2022, interacts with rising wages to create a powerful effect known as fiscal drag. As people's nominal earnings increase with inflation, a larger portion of their income is pushed into higher tax brackets, even if their real-terms purchasing power hasn't improved.
The Financial Impact on Households
The consequences for British taxpayers are stark. According to analysis, if the freeze continues until April 2030, an individual who earned £100,000 in 2022 could pay £7,077 more in tax than if the thresholds had risen with inflation.
The additional tax burden scales down with income but remains substantial across the board. Someone on £80,000 would pay £5,635 more, a person earning £50,000 faces an extra £4,632, and an individual on £35,000 would pay £926 more.
The Institute for Fiscal Studies estimates that these freezes will reduce average household incomes by £1,250 by the 2025-26 tax year.
Broader Implications and Expert Advice
Ade Babatunde, Senior Financial Planning Director at Rathbones, warns that the Chancellor may extend the freeze further to plug the nation's financial gap. "It’s taxation by stealth: the rates stay the same, but a bigger slice of your pay disappears into the taxman’s coffers," he stated.
Babatunde also highlighted that the freeze extends beyond income tax, affecting capital gains, dividend, and inheritance tax thresholds, quietly pulling more people into the net. He advises households to prepare now by:
- Maximising ISA and pension allowances
- Increasing pension contributions
- Seeking professional financial advice to ensure more of their money works for them
An extension of the freeze by two years could raise an additional £7.5 to £8.3 billion72.6 per cent of all earners by the 2029/30 tax year.
