The government has confirmed a significant extension to the freeze on income tax thresholds, locking them in place until the 2030-31 tax year. This decision is projected to raise an additional £7.6 billion in revenue for the Treasury by 2030 and will substantially increase the number of people paying income tax.
What is Being Frozen and For How Long?
For taxpayers in England, Wales, and Northern Ireland, the current income tax bands will remain unchanged until April 2031. It is important to note that Scotland sets its own income tax bands separately. Historically, these thresholds were adjusted annually in line with the Consumer Prices Index (CPI) inflation, helping to shield earners from the effects of rising living costs.
However, this policy has been paused. Most thresholds have been held at their 2022-23 levels since April 2028, and this new announcement tacks on an additional three years to that freeze.
The Mechanism of Fiscal Drag
The primary effect of extending the freeze is the amplification of a phenomenon known as fiscal drag. This occurs when tax brackets are not increased with inflation. As individuals receive pay rises to keep up with the cost of living, a larger portion of their income is pushed into a higher tax bracket, even if their real-term purchasing power hasn't significantly improved.
This strategy of freezing thresholds, rather than explicitly raising income tax rates, is seen as a way for the government to increase revenues without technically breaking manifesto pledges on tax hikes for working people.
Consequences for Workers and Taxpayers
The impact will be felt across the earnings spectrum. For lower earners, the personal allowance – the amount you can earn before paying income tax – will remain at £12,570. With the minimum wage for those aged 21 and over rising to £12.72 per hour next April, more part-time workers on the minimum wage will find themselves starting to pay income tax.
The Office for Budget Responsibility (OBR) estimates that this will result in 780,000 more people being brought into the income tax system by the 2029-30 tax year.
For higher earners, the freeze is equally significant. The threshold for the higher rate of tax, which jumps from 20% to 40%, is frozen at £50,271. The OBR forecasts that 920,000 more people will be pulled into this higher tax bracket in 2029-30. Furthermore, approximately 4,000 additional taxpayers will be moved into the additional tax rate of 45%, which applies to earnings over £125,140.
When combined with the extended freeze on the National Insurance Contributions secondary threshold, the total revenue raised by these measures is expected to reach £8.3 billion.
