How the ‘Stealth’ Income Tax Increase from the Budget Impacts You
Rachel Reeves announced a significant extension to the freeze on income tax thresholds during the latest Budget presentation. This measure, aimed at increasing revenue, will result in more earners facing higher tax liabilities through what is often referred to as a ‘stealth’ tax increase.
Understanding the Income Tax Freeze
Initially implemented in 2022, the tax-free personal allowance has been fixed at £12,570, a decision made by the previous Conservative administration. The freeze, originally slated to last until 2028, will now extend for an additional three years, lasting until the 2030/31 fiscal year according to the Office for Budget Responsibility (OBR).
This approach is indicative of a phenomenon known as “fiscal drag,” where stagnant tax thresholds result in more individuals being pulled into higher tax brackets as average incomes rise. As a result, the Treasury anticipates this measure will generate an estimated £8 billion in revenue by the 2029/30 fiscal year.
Projected Taxpayer Impact
- By 2029/30, an additional 780,000 individuals will be classified as basic-rate taxpayers.
- The number of higher-rate taxpayers is expected to rise by 920,000.
- Approximately 4,000 more individuals will fall into the additional-rate category.
From April 2028, basic-rate taxpayers will see an annual tax increase of £140. However, those earning over £125,140, who are already subject to the top rate of income tax, will not be impacted.
Income Tax Basics
Income tax applies to various forms of earnings, calculated based on amounts exceeding personal allowances and their corresponding tax bands. As it stands:
| Income Band | Tax Rate |
|---|---|
| £0 – £12,570 | 0% (Personal Allowance) |
| £12,571 – £50,270 | 20% |
| £50,271 – £125,140 | 40% |
| Above £125,140 | 45% |
In Scotland, different income tax rates apply. Notably, the personal allowance decreases by £1 for every £2 earned beyond £100,000 and vanishes completely for those earning above £125,140.
The Implications of ‘Stealth’ Taxation
The extension of the freeze on the income tax personal allowance is being criticized for its role in augmenting Treasury revenues without explicit tax rate hikes. This strategy contrasts sharply with historical practices where allowances rose with inflation or earnings.
The freeze until 2030 raises concerns about its projected impact on household incomes. The Institute for Fiscal Studies projects an average reduction of £1,250 in household income by the 2025-26 financial year, outweighing any benefits gained from previous tax cuts, such as national insurance reductions.
Economists estimate that the ongoing freeze on tax thresholds could generate an additional £39 billion annually by 2029/30, a figure comparable to increasing all income tax rates by 3.5 percentage points.
As the government navigates its fiscal responsibilities, understanding these changes is crucial for taxpayers anticipating the long-term effects on their earnings and financial planning.
