The impact of frozen tax thresholds on your take-home pay is a hot topic, and it's time to delve into the details.
Tax thresholds are like a sliding scale, determining how much income tax and National Insurance you pay as your salary increases. You start with a personal allowance, currently £12,570, where you pay no income tax. Beyond that, you move into the basic rate (20%) for earnings up to £50,270, and then the higher rate (40%) up to £125,140. Anything above that is taxed at 45%.
But here's where it gets controversial: if you earn over £100,000, you start losing £1 of your personal allowance for every £2 you earn above that threshold.
Historically, governments have adjusted these thresholds to keep up with inflation, ensuring your take-home pay isn't eroded by rising living costs. However, thresholds have been frozen since 2022, and this freeze is set to continue into the next decade.
Our calculations show that, for someone earning the average UK salary of £39,000, the freeze will add £465 to their 2030-31 income tax and National Insurance bill. For those earning £50,000, it's an estimated £1,309 more.
Economists often refer to this as a 'stealth tax', as it increases government revenue without an explicit rate hike. Both Labour and Conservative governments have used this tactic to boost tax receipts, which fund essential public services like the NHS, schools, and welfare.
Most earners will pay more due to the freeze, but those whose pay rises push them into the basic or higher tax rates will see the biggest increases in their tax liabilities.
The government's own analysis shows that lower-income households benefit from the freeze, while higher-income households lose out. However, this analysis only covers up to 2028-29 and doesn't account for the extended freeze period.
Independent research by the National Institute of Economic and Social Research (Niesr) indicates that lower and middle-income households are disproportionately affected by the extended freeze, in percentage terms.
The initial freeze was implemented in 2022 by former Conservative Chancellor Rishi Sunak, who paused thresholds until 2026. The Conservatives later extended this by two more years, and current Chancellor Rachel Reeves has now confirmed the freeze will remain in place until 2031.
By 2030-31, the Office for Budget Responsibility (OBR) estimates that an additional 5.2 million people will be paying the basic rate of income tax due to these threshold freezes. An estimated 4.8 million more will be paying the higher rate, and 600,000 more will be paying the additional rate.
The OBR forecasts that the freezes will generate £56 billion in revenue in 2030-31, with £12 billion of that due to Reeves's extension.
Our tax calculator provides an estimate of how much extra tax and National Insurance you could pay in 2030-31 because of the frozen thresholds. It's important to note that this calculator doesn't account for all the factors that can affect your tax bill, such as pension contributions, other taxes, and tax credits. It's also specific to employees in England, Wales, and Northern Ireland, as Scotland has different tax bands and thresholds.
So, what do you think about the government's decision to freeze tax thresholds? Is it a necessary measure to fund public services, or does it unfairly impact certain income groups? We'd love to hear your thoughts in the comments below!
