The government has announced that it will freeze income tax thresholds until 2031, pulling more people into higher tax brackets as wages rise.
The move, beyond industry expectations of a two-year extension, is expected to raise around £8 billion and drag nearly one million more people into paying tax.
The Chancellor previously ruled out plans to raise income tax rates in the Budget after widespread backlash over the decision.
The higher and additional-rate thresholds have been frozen at £50,270 and £125,140, respectively, until 2030-31.
There had been speculation that the government would lower the higher-rate income tax threshold to £45,000.
Total tax rises announced in the Budget are expected to raise an extra £26bn by 2029-30, including through the freezing of personal tax thresholds.
A leaked OBR report says the combined tax increases will bring "the tax take to an all-time high of 38% of GDP in 2030-31".
The freeze on tax thresholds, combined with rising wages, is pulling more people into higher tax bands – a phenomenon known as fiscal drag. Higher earners could pay over £7,000 in additional income tax over the period since thresholds were first frozen in April 2021.
Quilter's analysis shows that for someone earning £44,000 today, extending the freeze increases their tax bill by £843 over the next four years to 2030. For a worker earning £40,000 today, the freeze adds £321 over the period to 2030.
Rathbones estimates that someone earning £100,000 by April 2025 would face an extra tax burden of £4,043, compared with £2,517 if the freeze ends in April 2028.
In last year's Budget, Reeves pledged that the freeze in income tax and national insurance thresholds would not be extended past 2028.
LCP partner Steve Webb says a longer than expected freeze in the tax-free personal allowance is likely to result in even more pensioners being brought into the tax net than expected. At present, around 8.7m pensioners pay income tax. Even though pension age will rise from 66 to 67 over the next two years, the number of pensioners paying income tax will rise to at least 9.3m in 2029/30. But an extra year of freeze makes it highly likely that 10m pensioners – more than three quarters of all pensioners – will be taxpayers in 2030/31.
Christine Cairns, tax partner at PwC UK, said: "The elephant in the room is the continued effect of ‘fiscal drag’. The freeze on personal tax thresholds until April 2028, rather than indexed to follow inflation, naturally means many working people are paying more tax, sooner than they otherwise would. An extension to the freeze to 2030 would likely raise over £10 billion over the two additional years."
Shaun Moore, tax and financial planning expert at Quilter, commented: "People have already been dragged into higher tax brackets simply because their wages have risen only to stand still in real terms. Lowering the thresholds now would compound that injustice. For many households that combination will feel incredibly regressive and make them poorer in real terms despite on paper having higher salaries.
"Income tax thresholds are meant to provide protection against fiscal drag - not used as a tool to raise ever more revenue. Freezing them for years has already brought record numbers of people into higher rate tax. Actively cutting the thresholds would be a far more aggressive step and risks pulling millions more people into paying higher rate tax almost overnight. If the government then extends the freeze into future years, it pours fuel on the fire. Fiscal drag becomes a defining feature of the tax system, with more and more people becoming higher rate taxpayers simply because inflation did the heavy lifting for the Treasury.
"Politically the attraction of threshold changes is obvious. Ministers can say income tax rates are untouched while still raising many billions. But it is hard to square that with promises to protect “working people”. It is a blunt and opaque tool and risks eroding trust in the tax system at a time when the public expects clarity and honesty about the fiscal choices ahead.
"Reeves might think this move side steps more criticism but it is likely to do the opposite. Instead the idea of a "smorgasbord" of tax changes introduces yet more complexity to a tax system already plagued with it."
