" I have come to the conclusion that extending the threshold freeze would hurt working people and would take more money out of their pay slips."
- Rachel Reeves
Chancellor Rachel Reeves has confirmed that the freeze in income tax and national insurance thresholds will not be extended past 2028.
In today's Budget, Reeves said: "Having considered this issue closely, I have come to the conclusion that extending the threshold freeze would hurt working people and would take more money out of their pay slips. I am keeping every single promise on tax that I made in our manifesto. There will be no extension of the freeze in income tax and national insurance thresholds beyond the decisions by the previous government."
Therefore, from 2028-29, personal tax thresholds will be uprated in line with inflation.
Currently, people can earn up to £12,570 tax-free, before paying 20% tax on everything between £12,570 and £50,270 and 40% up to £125,140, after which there is a 45% additional rate.
John Hartley, head of business crime and regulatory at Primas Law, said: “In relation to income tax, whilst these have not been increased the thresholds will remain frozen for a further 4 years. As the cost of living increases we may therefore see more and more individuals falsifying their income and undercooking this to avoid higher tax penalties. In addition, whilst the details are yet to come, the changes to UK nationals with non-domiciled status will have a dramatic affect on tax liabilities and may again lead to potential tax evasion."
Steven Cameron, pensions director at Aegon, added: “The Chancellor has held the previous government’s freeze on income tax thresholds until 2028 but has signalled she will then ‘Let it Go’ to rise in line with inflation, as happened before 2022.
“This freeze, often referred to as a stealth tax, means that the thresholds for paying basic and higher rates of income tax will remain unchanged at their 2022 levels, rather than the previous convention of increasing each year in line with inflation. When people get a pay rise, they can move from below to above a threshold, leading them to pay a higher rate of income tax ‘by stealth’.
“According to analysis by the OBR, the current freeze will see millions more people starting to pay income tax or paying at a higher rate - between 2022-23 and 2028-29, this set of threshold freezes means nearly 4 million additional individuals will be expected to pay income tax, 3 million more will have moved to the higher rate, and 400,000 more onto the additional rate1.
“For those moving into the higher rate tax bracket, one thing to consider is whether you can afford to pay the extra over the higher rate threshold as a pension contribution. Doing so will mean you benefit from a higher rate of pensions tax relief at 40%.
“Another group at risk of being affected in future are pensioners on the full new state pension but no other income. From April 2025, the full new state pension has been confirmed as £11,975.60 per year. But with the threshold for paying income tax frozen at £12,570 even some small future increases will see them cross that threshold and face paying an income tax bill.
“It may be that the tax authorities will waive very small amounts. However, it’s far from certain that the taxman won’t come calling.”
Mike Ambery, retirement savings director at Standard Life, commented: “One of the biggest tax raising measures of recent years hasn’t resulted from a tax hike but instead the decision to freeze income tax bands at 2021/22 levels. The bands had been frozen until the end of 2027/28 tax year and it is has been confirmed that they will now rise with inflation beyond this.
“As the Personal Allowance will now rise beyond £12,570, many lower income pensioners will be relieved to see their state pension income less likely to fall into scope. From next April, the state pension alone will be 95% of the Personal Allowance, leaving pensioners with only £594.40 of headroom before they begin paying income tax.”
