The ongoing freezing on income tax thresholds has been extended to the end of the 2030/31 tax year, as part of measures set out in the Autumn Budget. The decision means more people will be pulled into higher tax brackets as earnings increase, known by economists as 'fiscal drag' and sometimes referred to as 'Bracket creep'.
The freeze began in 2021 under the previous government and was set to run until 2026, which was then revised to 2028. By extending the policy until 2031, Chancellor Rachel Reeves hopes to bring in more tax revenue without increasing any rate of income tax.
Prior to 2021, tax bands had steadily increased each year to match inflation. Not increasing tax bands is often labelled as a 'stealth tax', as it does not grab the same headlines or public attention as raising the rate of income tax or introducing a brand new tax. However, it still has a significant effect, with the OBR (Office for Budget Responsibility) estimating that there will be 780,000 more basic-rate taxpayers, 920,000 more higher-rate taxpayers, and 4,000 more additional-rate taxpayers by the 2029/30 tax year.
Announcing the move during her Autumn Budget statement, Reeves said: "I know that maintaining these thresholds is a decision that will affect working people, I said that last year and I won't pretend otherwise now."
What is a 'stealth tax'?
Freezing income tax thresholds is widely considered to be a 'stealth tax' because it raises a considerable amount of money for the Treasury without increasing the rate of income tax. Introducing higher tax rates would generally be more obvious to the public, as it would be clear on your payslip that more of money is going out.
By relying on fiscal drag to bring more people into higher tax brackets, the Treasury is taking a more subtle approach to produce similar results.
The Institute for Fiscal Studies said: "Freezes to the thresholds at which the basic and higher rates of income tax begin to apply are alone expected to raise £39 billion a year in 2029-30 (roughly similar to the amount of revenue that would be raised by increasing all rates of income tax by 3.5 percentage points)."
What are the current tax thresholds?
A tax threshold is the point at which the tax rate on your earnings changes.
There is an initial personal allowance of £12,570, which is the amount you can earn before you pay income tax. If your income is more than £100,000 - including pension contributions - your personal allowance is reduced by £1 for every £2 you earn. That means earning £125,140 will leave you with no tax-free allowance.
After your income passes the tax free allowance, the thresholds are:
- the basic rate of 20% for £12,570 to £50,270
- the higher rate of 40% for £50,271 to £125,140
- the additional rate of 45% for anything over £125,140
Only the portion of the income within a certain threshold is taxed at that rate. This means that if you earn £55,000, you have £12,570 taxed at 0%, £37,700 taxed at 20% and £4,730 taxed at 40%. There is a common misconception that once you earn above a certain threshold, your entire income is taxed at that rate.
The thresholds are the same in England, Wales and Northern Ireland, but they are different in Scotland, where they are set by the Scottish government.
What is the impact of freezing tax thresholds?
The most obvious impact is that people will pay more tax. Every person who gets a pay rise will end up paying more tax than they would have if the thresholds had risen with inflation. This is especially true if your pay rise takes you beyond a tax threshold and you start paying a higher rate on the extra income. According to the OBR, 24% of people will pay the higher or additional rate of tax by 2030/31, compared to 15% currently.
While tax thresholds will not be going up, the State Pension and the minimum wage are increasing, bringing more low-income pensioners and workers towards paying tax. The New State Pension will be £12,547.60 a year and the minimum wage will be £12.71 an hour, equating to a gross annual salary of approximately £24,784, from April 2026.
The OBR estimates that if the tax-free personal allowance grew with the consumer prices index (CPI) rate of inflation during the frozen period of 2021 to 2031, it would hit £17,470, £4,900 more than the current level. The higher rate threshold would be £20,100 more, at £70,371.
Ultimately, the effect is that more people pay tax and more people pay a higher rate of tax. Hargreaves Lansdown calculated that someone earning £50,000 this year will pay £8,165 more in tax between 2021 and 2031 as a result of the freeze.
If you want to learn more about what else has changed following the Chancellor's announcements today, check out our 'Autumn Budget 2025 roundup'.
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