Millions to pay more tax as Chancellor extends income tax freeze for a further three years
Hundreds of thousands more people will find themselves paying tax for the first time after it was revealed in a leaked Office for Budget Responsibility (OBR) document that income tax thresholds will remain frozen
Millions will pay more tax as existing freezes to personal tax thresholds are extended until 2030-31, in what many have branded a "stealth tax".
Listen to this article
More people are set to pay tax after the freeze was revealed in a leaked Office for Budget Responsibility (OBR) document, with income tax thresholds set to remain steady for three years.
Chancellor Rachel Reeves promised that there wouldn't be "a return to austerity" as she delivered her 2025 Budget to MPs sitting in the House of Commons on Wednesday afternoon.
The leaked document confirmed the Budget “raises taxes by amounts rising to £26 billion in 2029-30, through freezing personal tax thresholds and a host of smaller measures”.
The higher-rate threshold and additional-rate threshold are frozen at £12,570, £50,270 and £125,140.
Read more: What's in the Budget? Key points at a glance
Read more: Treasury watchdog plunge Reeves’ Budget into turmoil after leaking £26bn tax rise
In the past, thresholds were increased each year in-line with Consumer Prices Index (CPI) inflation, therefore better reflecting the rising cost of living.
But most thresholds have been held steady at their 2022-23 levels until April 2028 - a move that has been extended for another three years.
The freeze means more people will be affected by so-called "fiscal drag".
This happens when thresholds are not adjusted for inflation, so more taxpayers are dragged into a higher tax bracket when they get a pay rise.
The freeze on tax thresholds will result in 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers in 2029/30, raking in about £8 billion for the Exchequer.
Opting for this change, as opposed to increasing income tax rates, means the Chancellor may have avoided breaking a key Labour manifesto pledge not to raise taxes for working people.
Someone who earns less than £12,570-a-year qualifies for the personal allowance, meaning they do not have to pay basic-rate income tax up to that amount.
Meanwhile, the minimum wage is set to increase to £12.72 an hour next April, for eligible workers aged 21 and over.
Keeping the allowance the same until 2031 means that more part-time minimum wage workers will be dragged into paying the basic-rate of income tax on their earnings.
James Cleverly told LBC: “Labour may have beaten a chaotic retreat from their widely slammed plan for an outright income tax hike, but they are just shifting the focus of their tax grabs elsewhere – and they have the family home firmly in their sights once again”
In last year's budget, the Government announced that it would not extend the existing freeze on income tax and national insurance thresholds beyond 2027/28, saying it would "hurt working people" to keep thresholds frozen.
Read more: Rachel Reeves imposes mansion tax on properties over £2million in Autumn Budget
At the time, the Chancellor said that national insurance, VAT or income tax will not increase for working people in this Budget.
"I say to working people: I will not increase your national insurance, your VAT, or your income tax," Ms Reeves said.
Other personal tax changes include £4.7 billion through charging national insurance on salary-sacrificed pension contributions, and £2.1 billion through increasing tax rates on dividends, property and savings income by two percentage points.
The OBR revealed that Ms Reeves will introduce a series of measures aimed at helping people who are currently struggling with living costs, including a long-expected end to the two-child limit on benefits.
There will now be a limit on the amount of money people can put into their private pension pot, through a scheme called a salary sacrifice, before it incurs tax.
Anything above the new £2,000 cap will incur national insurance contributions from 2029, a move which has been estimated to raise £4.7 billion in 2029/30 and £2.6 billion in 2030/31.
At the moment, there is no limit.
The two-child cap prevents parents from claiming universal credit or tax credits for more than their first two children.
The cap, introduced by the Conservative government in 2017, has been widely criticised by Labour MPs and anti-poverty advocate groups, who have said lifting it is one of the main levers ministers could take to alleviate poverty.
The move is estimated to cost £3 billion by 2029/30, according to the OBR.