Thousands of UK households are set to receive letters from HMRC demanding an average of £8,165 in additional tax, a direct consequence of the Autumn Budget decision to extend the freeze on income tax allowances.
The £50,000 Threshold: A New Tax Trap
The taxman is primarily targeting households with an annual income exceeding £50,000. This is due to a 'fiscal drag' effect created by the multi-year freeze on the personal allowance and higher-rate tax threshold, which have not kept pace with inflation.
According to the Office for Budget Responsibility (OBR), had the personal allowance risen with CPI inflation since 2021 through to 2030-31, it would be £4,900 higher. Similarly, the point at which people start paying the higher rate of tax would be a staggering £20,100 higher.
This policy means the proportion of taxpayers paying either the higher or additional rate of tax is projected to jump significantly, from 15% in 2021-22 to 24% by 2030-31.
The Ripple Effect on Your Finances
Investment firm Hargreaves Lansdown has calculated the direct cost for an individual. They state that someone earning £50,000 this year will pay £8,165 more in tax between 2020 and 2031 because of the extension of the freezes.
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, warns that the impact goes far beyond income tax. "It’s not just the tax on earnings that’s affected," she explains. "When you start paying higher rate tax, your personal savings allowance shrinks, from £1,000 for basic rate taxpayers to just £500." For additional rate taxpayers, this allowance disappears completely.
The financial consequences widen further. Ms Coles added: "You also pay a higher rate of capital gains tax when you cross into paying higher rate tax, and your dividend tax rate rises as you cross each income band." This creates a substantial and complex financial burden for those dragged into the higher tax bracket.
What Steps Can You Take?
In light of these changes, financial experts are urging proactive measures. "It means everyone, whatever their income, needs to consider the steps they can take to protect themselves," advises Ms Coles.
Commenting on the Budget, Ingrid McCleave, a partner and tax specialist at city law firm DMH Stallard, noted that a consultation is planned for those who may struggle with the new charges. "There will be a consultation on ways of deferring the payment for those that are struggling, possibly on sale," she said.
Ms McCleave also highlighted that the Valuation Office will be tasked with identifying properties affected by the new surcharge, which comes into effect in April 2028 and will be based on 2026 property values. Revaluations are scheduled every five years, with annual increases tied to the Consumer Price Index.
She concluded by noting that "Trusts, companies, and partnerships are likely to be brought into the charge after consultation," a move that could potentially dampen house prices just below the key band thresholds of £2M, £2.5M, £3.5M and £5M.
