Chancellor Rachel Reeves has confirmed a significant extension to the freeze on income tax thresholds, which will now remain locked until the 2030-31 tax year.
How Fiscal Drag Increases Your Tax Bill
This policy continuation, originally implemented by Rishi Sunak in 2021 and subsequently extended by the Conservative government, creates what economists call "fiscal drag". This occurs when people receive pay rises that push them into higher tax brackets because the thresholds haven't moved to account for inflation.
The freeze affects all major income tax points in England, Wales and Northern Ireland. The personal allowance remains at £12,570, the basic rate threshold at £50,270, and the higher rate threshold at £125,140.
The Growing Impact on British Taxpayers
According to the Office for Budget Responsibility (OBR), had thresholds increased with inflation since 2021, the personal allowance would be £4,900 higher and the higher-rate threshold would be £20,100 higher by 2030-31.
The investment firm Hargreaves Lansdown has calculated that someone earning £50,000 this year will pay £8,165 more in tax between 2020 and 2031 as a direct result of the extension.
The OBR projects that the proportion of taxpayers paying either higher or additional rate tax will surge from 15% in 2021-22 to 24% in 2030-31.
Beyond Income Tax: Wider Financial Consequences
Sarah Coles, head of personal finance at Hargreaves Lansdown, warns that the impact extends far beyond income tax alone. "When you start paying higher rate tax, your personal savings allowance shrinks from £1,000 to £500, and disappears altogether for additional rate taxpayers," she explains.
Higher capital gains tax rates and increased dividend taxes also apply as taxpayers cross each income threshold, creating a compound effect on household finances.
The chancellor's decision represents one of the most significant stealth tax measures in recent history, with millions of Britons facing effectively higher tax rates despite no official increase in percentage rates.
