Millions of workers across the UK are poised to face higher tax bills in the coming years, despite the government reportedly abandoning plans for a direct increase in income tax rates. Chancellor Rachel Reeves is expected to use the 2025 Budget to extend a stealthier form of revenue raising: the freeze on income tax thresholds.
The Mechanics of 'Fiscal Drag'
Instead of raising the headline rates of income tax, the Treasury is set to continue the existing policy of freezing the thresholds at which people start paying the basic and higher rates of tax. This measure, known as 'fiscal drag', has been in place for several years and is now expected to be prolonged until 2030.
The mechanism is simple but effective. As wages increase with inflation, the tax bands do not move. This means that over time, more and more workers will find that a larger portion of their salary is taxed at the higher rate, and some will be pulled into a higher tax bracket entirely, even if their real-terms standard of living hasn't improved.
This quiet change is projected to be a significant money-maker for the Treasury, reportedly raising around £8 billion per year if extended for the planned two additional years.
A Shift in Strategy for the Treasury
Reports indicate that Chancellor Rachel Reeves has decided against implementing a direct income tax hike after receiving improved economic forecasts from the Office for Budget Responsibility. These new projections suggested a smaller-than-anticipated gap in the public finances, providing some fiscal breathing room.
This reversal also aligns with a key Labour manifesto commitment not to raise income tax. However, experts warn that the overall tax burden is still set to climb. The threshold freeze is a powerful tool for generating revenue, and the government is understood to be considering a suite of other, smaller tax changes to fund its spending plans.
What This Means for Your Wallet
For the average household, the consequences of the extended freeze are clear and tangible. The effective tax take will gradually increase, reducing the real-world benefit of any pay rises.
Take-home pay will rise more slowly than gross pay, and a growing number of people will find themselves becoming higher-rate taxpayers. This occurs even without any official announcement of a tax increase, as the silent effect of fiscal drag takes hold.
Beyond the central threshold freeze, the government is also evaluating other potential measures. These include a possible new levy on high-value homes, which could affect around 300,000 properties, predominantly in London and the South East. Changes to salary sacrifice schemes, which are popular for things like cycle-to-work programmes and electric vehicle leasing, are also under consideration.
The full details will be confirmed when the Chancellor delivers the Budget on November 26. For now, the indication is clear: while headline tax rates may remain stable, the amount of tax paid by millions is on an upward trajectory for the rest of the decade.
