Budget 2025: thresholds frozen to 2031

Sara White, Editor, Business & Accountancy Daily. Croner-i

In a blow for earners, chancellor extends income tax threshold freeze for another three years.

Rather than raise income tax rates which would have broken Labour’s manifesto pledge of not increasing the big three taxes on working people, the chancellor Rachel Reeves took the worst possible route freezing income tax thresholds endlessly into the future until April 2031, long after the next election will be over.

This means thresholds will have been frozen since 2021, when the pandemic first forced this policy upon taxpayers.

After years of this, it is expected that more than a million taxpayers will be dragged into higher rate tax as a result, with the 40% rate likely to be paid by near to five million workers.

Nimesh Shah, CEO of Blick Rothenberg described the Budget as the ‘most damaging in living memory’.

He added: ‘It was a certainty that personal tax allowances and thresholds would be frozen in today’s Budget. I wasn’t expecting it would be for another three years and would drag almost one million people into higher rate (40%) tax. 

‘The real impact of frozen tax allowances and thresholds is that someone earning £20,000 is almost £600 worse off today; they will be over £1,000 worse-off in 2031.

‘The personal allowance will be frozen at £12,570 until 2031. Had it increased with inflation, it should today be worth nearly £16,000; and it should be worth closer to £18,000.  This is a significant tax increase on “working people” on lower incomes.

It is not only low earners that will be hard hit by the frozen thresholds and affect of fiscal drag despite the chancellor’s generous minimum wage increases.

CIOT president Nichola Ross Martin said: ‘Rachel Reeves’ smorgasbord of tax changes could give HMRC indigestion. It will mean more taxpayers, more tax returns and more work for tax collectors, as well as taxpayers and their advisers.

‘According to the OBR the extension of the freezing of income tax thresholds for another three years will mean 780,000 more people being brought into paying income tax and 920,000 more paying the higher rate. Freezing of other allowances and thresholds will also mean those taxes affect more taxpayers.’

But it is middle earners who are likely to really feel the impact.

Shah added: ‘The effect of frozen personal tax allowances and thresholds is severe for middle earners and has been a feature since 2010 when the higher rate band was £43,875; today it is £50,270 when it should be almost £68,500 had it increased with inflation.’ 

The Treasury sees the impact of fiscal drag as an easy way to collect money from the majority of taxpayers. The official costings show the measure will raise £3.36bn in 2028-29, £7.78bn in 2029-30 and an extraordinary £12.43bn in 2030-31.