The Treasury has confirmed that income‑tax thresholds will remain at their 2021 levels until April 2031, a policy that will keep the personal allowance at £12,570 and other key bands static while wages continue to climb. The Office for Budget Responsibility warns that the freeze will generate around £58 billion in extra revenue by the end of the decade and push millions of workers into higher tax brackets.
Frozen thresholds explained
Wages typically rise each year to keep pace with living costs, and tax bands are normally adjusted in line with inflation. Since 2021, however, the government has kept the personal allowance, the point at which earnings become taxable, and the thresholds for the basic‑rate and higher‑rate bands unchanged. As a result, a larger slice of any pay increase is subject to income tax, a phenomenon described by economists as a “stealth tax”. The policy has already added tens of billions to the Treasury’s coffers and is expected to reach £58 billion by 2030‑31, surpassing transport spending and approaching current defence outlays.
Who is affected
The freeze hits hardest on those whose earnings sit close to a tax threshold. Anyone receiving a pay rise that pushes them over £12,570 will begin to pay the 20 % basic rate, and those climbing past the higher‑rate limit of £50,271 will face the 40 % rate on a greater portion of their income. The OBR estimates that by 2031 an additional 6.8 million people will be liable for income tax who would not have been if the personal allowance had risen with inflation. Pensioners are also a particular focus: the basic state pension is set to rise to £13,036 next April, potentially pulling many retirees into the tax net, although a new pension tax allowance will protect those whose total income stays at or below the full state‑pension amount. National Insurance contributions follow the same thresholds, meaning that higher earnings will attract more NICs as well.
Higher‑rate and additional‑rate impacts
Because the higher‑rate threshold is frozen, the number of taxpayers paying the 40 % rate is projected to rise by 5.4 million by 2031. If thresholds had been indexed to inflation, a worker would need an annual salary of about £64,470 to enter the higher bracket; under the current freeze the cut‑off remains at £50,271. The same principle applies to the top 45 % rate, which applies to income above £125,140. The Institute for Fiscal Studies calculates that unfreezing the personal allowance this week would let basic‑rate earners save up to £198 annually and higher‑rate earners up to £395, but the benefit is partially offset for middle‑income earners by the 2024 reduction in National Insurance contributions.
Outlook after 2031
Wages have been growing faster than inflation in recent years, making the first five years of the freeze especially noticeable. If the Treasury maintains the policy beyond 2031, the relative burden on taxpayers will continue to increase unless earnings slow. The government has signalled that the freeze is a temporary measure to fund defence, the NHS, schools and support for the sick, disabled and elderly, but the long‑term fiscal implications remain a matter of debate among economists and political analysts.
Why it Matters
The decision to keep tax thresholds static until 2031 will reshape the tax landscape for millions of workers, gradually pulling more people into the income‑tax system and increasing the share of earnings subject to higher rates. This stealthy approach raises significant revenue without raising headline rates, but it also erodes the real value of take‑home pay, especially for those on the cusp of higher brackets and for retirees whose state pension is set to exceed the personal allowance. As a result, the policy could influence consumer spending, savings behaviour and the broader fairness of the UK’s tax system, making it a pivotal element of the nation’s fiscal strategy for the next decade.
