
The freeze on income tax thresholds, a long-standing policy to increase government revenue, is scheduled to end after 2031.
AI-generated summary
The policy of freezing tax thresholds has been used by successive chancellors since Rishi Sunak to increase revenue for public services. It effectively acts as a 'stealth tax' by capturing more income as wages rise.
Income tax thresholds, which have been frozen under successive chancellors, are expected to start to rise again after 2031.
John Healey may not have mentioned this change in his Budget speech - after all, it is still some way off - but according to the documents released by the Office for Budget Responsibility (OBR) this policy, which has been shaving additional tax off people's take-home pay for the past five years, is scheduled to end.
The proportion of your income that is taken in tax will continue to go up over the next four years in line with decisions made in previous Budgets.
But then the personal allowance - the point at which you start to pay tax - and other thresholds, where you tip into paying a higher rate of tax, will rise again with inflation, meaning you keep more of what you earn.
Freezing thresholds is often dubbed a stealth tax because, unlike raising the headline rates, it is not as obvious on your payslip.
It has been a useful way for chancellors from Rishi Sunak onwards to raise more money to help pay for things like defence, the NHS, schools and support for the sick, disabled and the elderly.
They hit you hardest if your income is close to one of the tax thresholds, but anyone who gets a pay rise is affected, as long as you earn enough to pay tax. Only people earning under £12,570 - the personal allowance threshold - pay no income tax.
The state pension is currently just below the personal allowance threshold, and pensioners looked set to be drawn into paying tax from next April, when the basic state pension rises to £13,036.
However, the chancellor is putting in place a new separate Pension Tax Allowance, which will mean that anyone who gets an income only from the state pension will not pay tax on it.
The personal allowance threshold is set for the whole UK, so people in Scotland will also be affected, although other tax bands there vary.
National Insurance Contributions (Nics) are levied according to the same thresholds.
Wages have risen sharply to keep up with inflation in recent years, making the impact of the first five years of this policy quite noticeable.
If the personal allowance had risen with inflation over the last five years, you would now be able to take home the first £16,070 of your pay without paying any income tax. Instead you pay 20% on anything you earn above £12,570.
The Institute for Fiscal Studies (IFS) estimates more than six million extra people will have been drawn into paying income tax by 2031 as a result of the frozen personal allowance threshold.
The IFS says if Healey had unfrozen the personal allowance this week, instead of keeping it in place until 2031, basic rate taxpayers would save up to £198 in tax a year.
Higher rate taxpayers would save £395 a year.
However, for people in the middle of the earnings range, a cut to Nics introduced in 2024 has offset the higher income tax bill.
How much of a difference "unfreezing" thresholds will make in four years' time depends on how fast wages are going up at that point.
There is no fundamental principle at stake, no point that is the "right" level for tax thresholds. Before the financial crisis the personal allowance was much smaller than today, and it was allowed to grow until the pandemic hit. Even in 2031 you'll be able to take home a bigger proportion of your earnings before income tax than you could back in 2008.
AI outlook — possibilities, not facts
Income tax thresholds will begin to rise with inflation after 2031.
Very likely · Within years

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