A typical worker could potentially face an additional £324 in annual taxes by the end of the decade if Rachel Reeves decides to extend the freeze on tax thresholds until 2030, according to recent analysis. Economists speculate that the Chancellor may consider extending this freeze—a tactic often referred to as a stealth tax—as a means to balance the budget, especially following a period of weak economic growth and rising government borrowing costs.
In her Budget announcement last October, Reeves stated that prolonging the freeze for another two years would generate “billions of pounds.” However, she initially chose not to go through with it, emphasizing that such a move would negatively impact working individuals by reducing their take-home pay. Despite this, she may find herself compelled to reverse her decision due to forecasts from the Office for Budget Responsibility, which are expected to reveal that the £9.9 billion fiscal headroom she had anticipated has been effectively eliminated.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), indicated that extending the freeze on income tax thresholds is likely to be among the top policy options the Chancellor is considering. Recently, the Treasury has not dismissed the idea of such a move or other tax increases in the upcoming Spring Statement.
Recent calculations by the wealth management firm Quilter, published in The i Paper, suggest that a worker earning £40,000—approximately the average wage for those in their prime earning years—could end up paying £10,884 in income tax and national insurance by the 2029/30 fiscal year if the tax thresholds remain frozen. In contrast, if the freeze were lifted, the personal allowance—the threshold below which no income tax is paid—would rise to £13,337 by the end of the decade. This would represent a savings of £324 compared to what they would owe if the allowance stays frozen at £12,570, and the effect would be even more pronounced for higher earners.
- For instance, workers currently earning £70,000 could pay an additional £644 in taxes and national insurance by 2030 if the thresholds remain unchanged.
- Under frozen thresholds, the £40,000 earner would see their income rise to £51,051 after several pay raises, while paying £10,560 in taxes.
Quilter’s analysis assumes a 5% annual pay raise for workers, with inflation projected at 3%. However, predicting inflation and average earnings over several years is inherently uncertain, and these figures may vary significantly.
Currently, inflation is at 3%, with expectations of an increase later this year followed by a decrease, while average earnings growth is presently above 5%, although historically it has averaged lower.
Tax Thresholds and Government Strategies
The income tax threshold—the point at which taxpayers begin paying income tax—has traditionally been adjusted annually for inflation. However, this threshold was frozen by the previous Conservative government in April 2022 at £12,570. Similarly, the higher rate threshold, which applies to income exceeding £50,270, was also frozen. This freeze is scheduled to conclude in 2028.
This method of freezing thresholds is often viewed as a stealth tax, as it effectively raises taxpayers’ taxable income without increasing the tax rates themselves—a phenomenon known as “fiscal drag.” This approach could enable the Labour government to assert that it is not violating its manifesto commitment to refrain from raising taxes on “working people.”
The Chancellor is anticipated to announce new spending cuts or tax increases in her Spring Statement on March 26 in order to adhere to her self-imposed fiscal guidelines, which limit borrowing. The IFS noted in a recent report that an extension of the tax threshold freeze could serve as a means for the Government to generate additional revenue, particularly as it seeks to boost defense spending.
According to Johnson, extending the freeze would lead to more individuals falling into the higher 40% tax bracket, reversing some of the increases in personal allowances achieved in the 2010s, and creating sustained fiscal drag that alters the structure of the income tax system. He remarked that it is often politically simpler for governments to implement these stealth taxes rather than increase headline tax rates. Indeed, no Chancellor has raised the main income tax rate in 50 years, except for Labour’s introduction of a 50% top rate in 2010.
Johnson stated, “We may have a basic rate of tax at 20%, but we are seeing an increasing number of individuals paying income tax at 40% due to these long-term freezes.” He further emphasized that while the political implications of such measures are clear, their economic justification is less obvious.
On the broader issue of potential tax increases, Johnson expressed skepticism about the Government’s ability to finance its goal of allocating 3% of GDP to defense spending without resorting to tax hikes. “It will be challenging to find additional resources for defense without looking at tax increases,” he noted.
In her last Budget, Reeves reaffirmed her commitment to increasing the thresholds starting in 2028.
The Chancellor stated, “From 2028-29, personal tax thresholds will be adjusted in line with inflation once again. When it comes to tax policy, this Government is committed to protecting working individuals at every opportunity.” However, she now faces the daunting task of identifying either spending cuts or tax increases in her upcoming Spring Statement to remain compliant with her fiscal guidelines.
Shaun Moore, a tax and financial planning expert at Quilter, remarked, “The government’s manifesto commitment not to raise taxes on working people has placed the Chancellor in a precarious position. While she may be hesitant to backtrack on this pledge, the diminishing fiscal headroom leaves little room for maneuver in enhancing it.”
He added, “Prior to last year’s budget, there were speculations that the government might extend the current freeze on income tax thresholds to 2030. Although they opted not to proceed with this, the Chancellor acknowledged the potential revenue boost it could have provided, making it possible for her to reconsider extending the freeze.” Moore concluded, “Given the government’s repeated assertions of not altering headline tax rates, a tax increase seems less likely, which may impose an even heavier burden on workers than merely extending the freeze.”
Moreover, if the tax thresholds remain frozen, there are concerns that state pensioners may begin to incur income tax obligations even without additional sources of income. Recent analysis by Deutsche Bank indicates that the new state pension could rise to £12,631 from £11,973 in April 2026, marking a 5.5% increase. With frozen tax thresholds, this amount would surpass the £12,570 personal allowance, making it the first instance where state pensioners would face income tax liabilities.
The Treasury has been contacted for comments regarding these developments.
