During the general election campaign and throughout their time in office, Keir Starmer and Rachel Reeves have consistently promised not to raise taxes on working people. This amounts to a commitment to keep Income Tax, National Insurance contributions (NICs), and VAT the same.
However, critics argue that while the chancellor hasn’t increased the rate of Income Tax, she is already presiding over rising taxes for working people. This accusation comes because, in her 2024 Budget, Reeves announced she would maintain the current freeze on the Personal Allowance until April 2028.
There is speculation that the chancellor could extend the freeze in her upcoming Budget on 26 November.
As the Personal Allowance remains static, you could pay more Income Tax in the future, even if the rate hasn’t increased on paper.
The Personal Allowance is the amount you can earn each year before paying Income Tax
To understand why it matters that the Personal Allowance is frozen, you must first consider how HMRC calculates the Income Tax you pay.
As of 2025/26, the first £12,570 of your income is tax-free. This is your Personal Allowance and covers earnings from employment as well as income from other sources, such as a pension.
Any earnings that exceed the Personal Allowance are subject to Income Tax and the amount you pay depends on the tax bracket you fall into.
In 2025/26, you will pay:
- The basic rate of 20% on income between £12,570 and £50,270
- The higher rate of 40% on income between £50,271 and £125,140
- The additional rate of 45% on income that exceeds £125,140.
These rates of Income Tax haven’t changed, but as the Personal Allowance and thresholds at which you move into different brackets stay the same, you could pay more tax.
“Stealth taxation” could mean you pay more Income Tax
You likely saw headlines about high inflation in the past five years as the cost of living rose sharply. While price increases of this kind are problematic, many consider some level of inflation to be an important part of a well-functioning economy.
The Bank of England (BoE) aims to keep inflation at around 2%.
This is because, as the economy grows, the price of goods and services tends to rise. As a result, wages typically increase to keep up with rising living costs.
For example, in 2021 – the last time the Personal Allowance increased – the average UK wage, according to Statista, was £31,285 a year.
By 2024, that had increased to £37,430.
Meanwhile, the Personal Allowance remained the same and more of your income may have been dragged into the taxable range. So, even though the rates of Income Tax haven’t increased, you’re effectively paying more tax.
The thresholds for the different Income Tax brackets are also frozen, meaning a larger portion of your earnings could move into a higher tax band.
This is known as “stealth taxation” and it’s a common way for governments to raise additional revenue without directly increasing tax.
Frozen Income Tax thresholds are predicted to raise £38 billion a year by 2029/30
The freeze on Income Tax thresholds is expected to raise significant revenue for the government.
According to the House of Commons Library, the latest estimates suggest the policy will raise £38 billion a year by 2029/30 as UK workers pay more Income Tax.
This is because the overall number of people paying Income Tax will increase and more will be pulled into higher tax brackets.
The Institute of Chartered Accountants in England and Wales (ICAEW) predicts that in 2025/26, 3.4 million people will pay Income Tax for the first time. There will also be an additional 2.8 million higher-rate taxpayers.
Your disposable income could be 1.4% lower by 2027 because of frozen thresholds
You might not notice the effects of stealth taxation. If you receive pay increases, your income is rising, on paper, and it may feel as though you have more money than before.
However, as Income Tax thresholds remain frozen, you are paying tax on a higher percentage of your earnings. Meanwhile, expenses such as your mortgage, groceries, utility bills, and fuel are rising.
This could mean that your disposable income is falling, even as your income increases.
In 2023, the Institute of Fiscal Studies (IFS) published data on the effect that frozen Income Tax thresholds would have on real household disposable income. The results showed that, by 2027, your disposable income could be 1.4% lower than it would have been if the Personal Allowance and higher-rate Income Tax threshold had risen in line with inflation.
Consequently, frozen thresholds could disrupt your financial plan as you have less disposable income to contribute to savings and investments for the future.
Get in touch
We can help you understand the effects of frozen Income Tax thresholds on your finances and find ways to manage your tax liability.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
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