The Government plans to extend the freeze on income tax thresholds until 2030, a move that will likely increase the tax burden for millions of workers over time. While Chancellor Rachel Reeves has reportedly abandoned plans for an income tax rate increase, financial experts warn that the ongoing freeze will push more individuals into higher tax brackets as their incomes rise, even without a change in tax rates.
This threshold freeze has been in place for several years and is often described by economists as a mechanism of “fiscal drag.” By not adjusting tax bands for inflation, more workers will progressively fall into higher tax brackets, leading to increased taxation on a larger portion of their income. If this freeze continues for an additional two years, it could generate around £8 billion annually for the Treasury.
As households grapple with higher living costs, the effective tax burden is expected to rise throughout the decade. This situation effectively diminishes the value of pay increases, as individuals may find that their take-home income does not reflect their gross earnings.
Impact of the Income Tax Threshold Freeze
The decision not to raise income tax rates stems from updated forecasts by the Office for Budget Responsibility, which indicated a smaller-than-expected shortfall in public finances. This shift allows the Government to adhere to commitments made in the Labour manifesto while still generating revenue through the threshold freeze.
Despite the absence of a rate increase, many workers can expect to pay more tax as their salaries increase. Individuals receiving regular inflation-linked pay rises may find themselves pushed into higher tax bands, meaning they will pay a larger percentage of their income in taxes, even if their standard of living remains unchanged.
Additional Tax Measures Under Consideration
Several other tax policies are reportedly under review by the Government. Among these is a new levy on higher-value homes, particularly affecting properties in council tax bands F, G, and H. Approximately 300,000 properties, mainly located in London and the South East, could face additional surcharges on existing council tax bills.
Further adjustments may also be made to salary sacrifice schemes that benefit individuals using arrangements for items such as bicycles, childcare, or electric vehicle leasing. Additionally, changes to the taxation of electric vehicles are being discussed, though specific details remain unconfirmed.
The Treasury has refrained from commenting on these potential changes, maintaining a policy of not discussing tax decisions prior to fiscal events.
The Government emphasizes the necessity of increasing “fiscal headroom,” which is essential for public finances to withstand economic uncertainties. Although the specific measures are evolving, ensuring financial stability remains a priority.
As the Budget approaches, many individuals may find that the main consequence of these decisions is a continued freeze on tax thresholds. This will result in slower growth of take-home pay compared to gross income, gradually pulling more workers into higher tax bands and likely increasing the overall tax burden, even without adjustments to headline tax rates.
The ongoing discussions around the 2025 Budget highlight the complexities of fiscal policy, which continues to evolve in response to changing economic conditions.
