The realities of extending the freeze of the Income Tax threshold 

Labour has repeatedly stated that working taxpayers will not be affected in the upcoming Budget, as Income Tax and National Insurance rates will be left alone.  

However, Chancellor Rachel Reeves will likely extend the freeze on Income Tax thresholds in the Budget on 30 October.  

Keeping the thresholds frozen still comes with consequences for taxpayers, a move some are calling a ‘stealth tax.’ 

Income Tax thresholds 

Here’s how Income Tax thresholds currently stand: 

• Personal allowance: £12,570 (the amount you can earn before paying any Income Tax) 

• Basic rate (20 per cent): £12,571 to £50,270 

• Higher rate (40 per cent): £50,271 to £125,140 

• Additional rate (45 per cent): Over £125,140 

These thresholds were already frozen until 2028, but now the Chancellor is expected to extend that freeze until 2030. 

The slow burn of fiscal drag 

Fiscal drag occurs when tax thresholds do not rise with inflation or wage growth and people end up in higher tax brackets.  

It means you pay more tax as your income increases, even if your purchasing power has not improved.  

The Institute for Fiscal Studies (IFS) estimates this extended freeze could pull 400,000 more people into paying Income Tax and push 600,000 others into higher tax brackets. 

What does this mean for individuals? 

For the typical taxpayer, fiscal drag can hit hard: 

• More of your income will be taxed at the 40 per cent or 45 per cent rates 

• The value of your personal allowance decreases as inflation climbs 

• You could see your disposable income shrink, making it harder to save or spend 

How will businesses be affected? 

It is not just individuals feeling the pinch. Businesses are likely to see the knock-on effects too: 

• Wage pressures: As the cost of living rises, employees may push for higher wages. But as those wage increases push staff into higher tax brackets, the benefit is reduced. 

• National Insurance contributions: If National Insurance thresholds are frozen as well, employers could face higher contributions. 

• Lower consumer spending: With less disposable income in people’s pockets, businesses may see a dip in spending, which could affect their bottom line. 

How to manage the impact 

While you can’t change Government policy, there are ways to reduce the impact of fiscal drag: 

• Tax-efficient savings: Maximise contributions to pensions or ISAs, as they help reduce your taxable income. 

• Salary sacrifice schemes: These allow employees to trade part of their salary for benefits like pensions or childcare vouchers, lowering taxable income. 

• Tax planning for businesses: Effective strategies can help manage wage increases and tax burdens. Our team can assist with tailored advice to minimise costs and maximise efficiency. 

Does this break Labour’s promise? 

The Government suggests this extended freeze does not breach Labour’s election promises.  

They pledged not to increase Income Tax rates, but they did not say anything about the thresholds.  

The extended freeze could generate £7 billion per year by 2030, helping to fill the UK’s £40 billion budget gap. 

For further advice and assistance about how these changes might impact your finances or business, contact us today.