Income tax: Healey’s budget leaves thresholds frozen again. How much more will you pay?

Tax policy means freezes reduce take-home pay as earnings rise in line with inflation

Income tax thresholds are set to remain frozen after John Healey’s first budget as chancellor.

One of the biggest tax rises in recent years has happened without a change in the rates at which people are taxed on their incomes. Instead it has come from successive government decisions to keep the thresholds associated with the tax at the same level each year, regardless of inflation.

Freezing tax thresholds results in “fiscal drag” – a phenomenon where people are dragged into higher tax bands when they get pay rises.

Until 2021, the UK income tax thresholds were typically increased each year in line with inflation. When the then chancellor, Rishi Sunak, delivered his budget that year he announced that thresholds would be frozen from April 2022 until 2026.

The Conservative government extended that freeze until 2028, and last year the then Labour chancellor, Rachel Reeves, announced it would continue until 2030. Healey did not mention the freeze in his budget, but the documents show it remains in place.

You can use our tool to find out how much more tax you will pay over as a result of the freeze. We have used forecasts from the Institute for Fiscal Studies for inflation and applied them to earnings and thresholds.

The final figure is the amount by which your tax bill will effectively be larger in 2030, compared with what it would have been if thresholds had moved with inflation. In each intervening year the increase would be smaller, but similar.

Figures for earnings above £100,000 take into account the loss of some or all of the personal allowance.

These are the point where the tax rate on your income changes. In England, Wales and Northern Ireland the thresholds are the same.

Everyone has a personal allowance of £12,570, and below that income is not taxed. Income between £12,571 to £50,270 is taxed at the basic rate of 20% if it is on earnings. Income between £50,271 to £125,140 is charged at the higher rate of 40%, and anything over £125,140 is taxed at the additional rate of 45%. There are extra charges on savings and property income.

If you earn more than £100,000 once things such as pension contributions are taken into account, your personal allowance is reduced by £1 for every £2 you earn. By the time you earn £125,140 you will get no tax-free personal allowance.

It’s important to remember that it is only the income that is over a threshold that is taxed at that rate – if, for example, you earn £60,000, only £9,730 (£60,000 minus £50,270) is taxed at 40%.

Until 2021 the thresholds were typically increased in each year’s budget.

Many people get pay rises each year in line with inflation. When tax thresholds rise at the same time, this means more of their new earnings stay at the lower rate. When tax thresholds are frozen, pay rises spill over into the next bracket. As a result you may find that you take home less of your extra earnings than you expected.

The Office for Budget Responsibility says had the personal allowance moved up in line with CPI inflation since 2021 and until 2030-31, it would be £4,900 higher, with the threshold for the higher rate to kick in £20,100 higher.

It says the freezes mean the proportion of taxpayers paying either higher or additional rate tax will have increased from 15% in 2021-22 to 24% in 2030-31.