The current thresholds – frozen by former Conservative Prime Minister Rishi Sunak since 2021 – have already led to 6.3 million taxpayers paying the basic rate for the first time, according to Quilter’s Freedom of Information request to HMRC.
A further 11.6 million will pay 20% on their income until the 2027-28 tax year ends, while eight million will be on the 40% higher rate.
As Chancellor Rachel Reeves announced in the Autumn Budget, the freeze on income tax thresholds will be thawed from the 2028-29 financial year. After then, the thresholds will rise in life with inflation.
While the tax-free allowance for the standard rate has stayed at £12,570 and the higher rate at £50,271, due to wage inflation, taxpayers are pushed closer to the limit of their tax band. This fiscal drag can often mean workers can be dragged into paying a higher amount of tax.
Further, around eight million pensioners will also be paying tax for the first time, as the continuing rise of the state pension pushes them over the tax-free allowance.
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‘Rumours Chancellor might backpedal’
Rachael Griffin, tax and financial planning expert at Quilter, said: “During the 2024 Autumn Budget, Chancellor Rachel Reeves stated that extending the freeze until 2030 would boost Government coffers by billions of pounds.
“However, she also noted that it would hurt working people and go against Labour’s manifesto commitments, declaring there would be no extension. Instead, from 2028-29, personal tax thresholds would be uprated in line with inflation once again.”
By then, a further 12 million workers will be higher-rate taxpayers, with an extra two million Brits paying the 45% additional rate.
Of that number of employees, over two-thirds (68%) will do so in the last three years up to the freeze coming to an end.
Griffin added: “Given the challenging fiscal position, there have been rumours that the Chancellor might backpedal and opt to freeze income tax thresholds until 2030. However, given the likely backlash and the Government’s commitment not to raise taxes for working people, this seems unlikely.
“Regardless of any extension, the lengthy freeze is resulting in a significant tax rise by stealth. As incomes rise, including state pension income, more people are being dragged into paying tax for the first time or into higher tax brackets, a phenomenon known as fiscal drag.
“Even without an explicit tax rise, the Government will continue to collect more from taxpayers each year by keeping thresholds static. What’s more, as the state pension rises while the personal allowance remains stagnant, many pensioners will soon find themselves having to pay back a proportion of their state pension.
“Strategic financial planning has never been more important. Some will be able to mitigate their tax burden with options such as salary sacrifice arrangements and increasing pension contributions, whereas retirees should explore how they are taking income to ensure they are not paying more tax than necessary.”
