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Income tax thresholds that have been frozen under successive chancellors will remain at their current levels until April 2031 as planned. According to documents released by the Office for Budget Responsibility (OBR), the policy is scheduled to end after that point, allowing thresholds to start rising again with inflation.
Impact of the Freeze on Take-Home Pay
The proportion of income taken in tax will continue to increase over the next four years in line with decisions made in previous Budgets. Once the freeze concludes, the personal allowance—the point where individuals start paying tax—and other thresholds that trigger higher tax rates will rise with inflation, allowing workers to keep more of what they earn.
Freezing thresholds is often described as a stealth tax because it is less obvious on a payslip than raising headline rates. Chancellors from Rishi Sunak onwards have utilized this method to raise additional revenue to help fund defence, the NHS, schools, and support for the sick, disabled, and elderly.
The Office for Budget Responsibility calculates that the extra revenue generated by freezing tax thresholds will reach £58bn by 2030-31, an amount surpassing UK transport spending and nearing current defence expenditures.
Who Is Affected by the Frozen Thresholds?
The freeze hits individuals hardest if their income is close to a tax threshold, though anyone receiving a pay rise is affected as long as they earn enough to pay tax. Only individuals earning under £12,570, which is the personal allowance threshold, pay no income tax. By 2031, an extra 6.8 million people will be paying tax who would have been exempt if the personal allowance had not been frozen, according to OBR calculations.
Pensioners initially appeared set to be drawn into paying tax from next April when the basic state pension rises to £13,036, pushing it just above the personal allowance threshold. However, the chancellor is establishing a new separate Pension Tax Allowance to ensure low-income pensioners with income up to the value of the full new state pension will not pay income tax. The personal allowance threshold applies across the entire UK, affecting people in Scotland as well, and National Insurance Contributions are levied according to the same thresholds.
Normally, tax thresholds would be raised alongside wages to cover the rising cost of living. Because thresholds have been frozen at 2021 levels, a bigger proportion of rising pay ends up above the tax threshold. If the personal allowance had risen with inflation over the past five years, individuals could now take home the first £16,070 of a salary without paying income tax, instead of paying 20% on earnings above £12,570.
Higher Rate Taxpayers and Future Projections
The frozen thresholds also drag more people into the higher 40% tax bracket as incomes rise. An extra 5.4 million people will become higher rate taxpayers by 2031 due to the freeze, as reported by the OBR. If thresholds had kept pace with inflation, individuals would need to earn £64,470 this year before reaching the higher bracket, rather than the current threshold of £50,271 based on 2021 levels.
Almost one in four taxpayers will pay tax at the higher rate by 2031, according to the official government forecaster. The same principle applies to the additional 45% rate charged on incomes exceeding £125,140.
The Institute for Fiscal Studies (IFS) stated that if the personal allowance had been unfrozen, basic rate taxpayers could have saved up to £198 in tax a year, while higher rate taxpayers would save £395 a year. For middle earners, however, a National Insurance Contributions cut introduced in 2024 has offset the higher income tax bill.
The difference that unfreezing thresholds will make in four years depends on wage growth rates at that time. Historical context shows that before the financial crisis, the personal allowance was much smaller and was allowed to grow until the pandemic, meaning taxpayers in 2031 will still take home a larger proportion of earnings before income tax than they did in 2008.
