Income Tax thresholds are currently frozen until 2028 – but there are rumours that Rachel Reeves could extend this to 2030 in either her Spring Statement this week, or the Budget later this year
Taxpayers could pay thousands of pounds more in Income Tax if the freeze on tax thresholds is extended by another two years. Income Tax thresholds are currently frozen until 2028.
However, there are rumours that Chancellor Rachel Reeves could possibly extend this to 2030 in either her Spring Statement this week, or the Budget later this year. There is the personal allowance which is the amount we can earn without paying any Income Tax. This is currently set at £12,570 a year.
On earnings above this amount, you pay the 20% basic rate of Income Tax. There is a higher rate of 40% which is paid on earnings above £50,270, while anything above £125,140 is taxed at the 45% additional rate. Previously, these thresholds rose in line with inflation – but the freeze, introduced by the previous Conservative government, means more people are being dragged into a higher tax bracket when they earn more money, either through pay rises or if they change job.
This is a process known as fiscal drag, as it generates more tax for the Treasury without having to change how much tax workers are being charged. New research from Interactive Investor shows that, if the freeze is extended to 2030, the average earner on a salary of £35,000 could face a £416 higher tax bill due to fiscal drag.
The additional tax burden rises to £1,248 and £3,612 for those earning £50,000 and £100,000, respectively. These figures assume a 5.8% increase in wages for the upcoming tax year (2025/26), based on the latest ONS data, with wage growth continuing in line with the Office for Budget Responsibility’s annual inflation forecast until 2030.
Over the additional two-year period alone, the extra tax paid amounts to £223 for someone earning £35,000, £670 for those earning £50,000 and £80,000, and £1,939 for those earning £100,000.
Myron Jobson, Senior Personal Finance Analyst, Interactive Investor, said: “Fiscal drag is the stealthy tax grab that few see coming. As wages rise with inflation but tax thresholds remain frozen, more people find themselves paying higher tax rates – even if their spending power hasn’t actually improved. It’s like being quietly nudged into a higher tax band without ever feeling richer.
“With the personal allowance and higher-rate threshold frozen until 2028 – and possibly beyond – millions will be caught in the net, making it a lucrative, if sneaky, way for the government to boost its coffers without making headline tax hikes.
“On top of already announced cuts to welfare spending and civil service running costs, it appears that a bitter cocktail of spending cuts and (stealth) tax rises is on the table to restore public finances – even if the tax threshold freeze is not extended.”
Myron Jobson explained how increasing your pension contributions could help you stay out of higher tax bands. This can be done through a salary sacrifice arrangement, which is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit, such as pension contributions.
He explained: “Since your gross salary is lower, both Income Tax and National Insurance contributions are reduced before you even get paid. For high earners, pension contributions can also reduce their adjusted net income, helping them avoid tax cliff edges – such as the punitive 60% effective tax rate that applies to those earning between £100,000 and £125,140, where the personal allowance is gradually withdrawn.”
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