Workers earning a middle income of £44,000 could find themselves up to £3,000 worse off due to potential changes to income tax thresholds in the upcoming Budget, new analysis reveals.
The Treasury appears to have ruled out a direct income tax rise in the Budget scheduled for 26 November 2025. However, financial experts warn that extending and potentially lowering the existing freeze on income tax thresholds would have a severe impact on household finances.
The Stealth Tax Squeeze
Analysis from wealth manager Quilter shows that merely extending the current freeze on income tax thresholds would add an extra £843 to the tax bill of middle earners over the next four years.
This compounds existing concerns that threshold freezes disproportionately affect higher earners, confirming that those on middle incomes are also set to take a significant financial hit.
The situation deepens the effect of 'fiscal drag', a process where income tax thresholds drift further from inflation rates, silently pulling more people into higher tax brackets as their wages nominally increase.
A Policy Set in Sunak's Era
The current freeze on income tax thresholds has been in place since 2021, when Rishi Sunak served as Chancellor and inflation stood at approximately 2.5 per cent.
This policy was originally set to expire in 2028, but there is now speculation that Chancellor Rachel Reeves may extend it further as part of what the Financial Times describes as a 'menu of stealthier tax hikes'.
The Guardian's Pippa Crerar has suggested that there was insufficient political will within the Cabinet and among Labour MPs to push through a straightforward income tax increase that would clearly break manifesto commitments.
Experts Warn of 'Compounding Injustice'
Shaun Moore, tax and financial planning expert at Quilter, stated that lowering the thresholds would 'compound the injustice' of fiscal drag.
'The idea of cutting income tax thresholds is essentially an attempt to pretend that the last few years of high inflation never happened,' Moore explained.
'People have already been dragged into higher tax brackets simply because their wages have risen only to stand still in real terms.'
He emphasised the real-world impact: 'For many households that combination of fiscal drag and lower thresholds will feel incredibly regressive and make them poorer in real terms despite on paper having higher salaries.'
Moore was particularly critical of the approach, noting: '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.'
He slammed the prospect of further threshold freezes as a 'blunt and opaque tool that risks eroding trust in the tax system at a time when the public expects clarity and honesty about the fiscal choices ahead.'
With nerves around the 26 November Budget reaching new extremes, millions of British workers now face an anxious wait to see how the government's decisions will impact their financial wellbeing.
