The Chancellor, Rachel Reeves, has extended the freeze on Income Tax thresholds far beyond the original 2028 end date.
The rates of tax will now remain unchanged until the 2030/2031 tax year, significantly increasing the number of people who will move into higher tax brackets as wages rise.
What are the current Income Tax bands?
The thresholds remain fixed at:
For individuals earning more than £100,000, the personal allowance tapers away by £1 for every £2 earned over that level, disappearing entirely at £125,140.
Why does freezing thresholds matter?
Before 2021, Income Tax bands typically rose in line with inflation, helping to prevent taxpayers from drifting into higher bands simply because of annual pay increases.
With the thresholds locked in place, fiscal drag does exactly that — pulling more people into the tax system or into higher rates without any formal change in tax policy.
With the National Minimum Wage and National Living Wage also rising, many workers who previously paid little or no tax may now find themselves liable for Income Tax for the first time. Others will face increased tax bills even if their pay rises only cover the higher cost of living.
In practical terms, net income may grow only marginally, even as gross earnings increase.
Who feels the impact most?
The freeze hits several groups particularly hard:
As this continues through to April 2031, the cumulative effect becomes more significant each year.
Extension of the Inheritance Tax freeze
The Government has also prolonged the freeze on Inheritance Tax thresholds. The £325,000 nil-rate band and the £175,000 residence nil-rate band will now remain fixed until 2031.
With property prices still rising in many parts of the UK, more families are likely to find themselves facing an IHT liability purely because thresholds have not kept pace with asset values.
What steps should you consider?
A proactive review of your tax position can help lessen the effects of fiscal drag. If you would like to assess how the extended freezes may affect you, please contact us to review your personal tax arrangements.
