Big changes could be heading our way with the upcoming Budget announcement! Chancellor Rachel Reeves is reportedly freezing personal income tax thresholds again, extending it to 2030. For many, this means shelling out more in taxes without any official increase in tax rates. It’s all thanks to what’s called “fiscal drag,” where tax revenue rises because wages and prices surge, but tax brackets don’t budge.
The current income tax threshold for the lowest 20% stands at £12,570. With inflation pushing prices up, minimum wage workers are feeling the pinch, as their income tax contributions climb. The Institute for Fiscal Studies (IFS) warns that this freeze could force even part-time minimum wage workers to start paying income tax. In fact, the IFS predicts that by 2029–30, a minimum wage worker will need to work only 18 hours a week before they hit the tax threshold.
State pensioners aren’t spared either. For the first time, those relying solely on the state pension could find themselves taxed by 2027. With the pension set to rise just below the £12,570 mark next year, it’s on track to surpass this figure soon, potentially requiring all pensioners to deal with HMRC directly.
Benefit recipients, like those on Universal Credit, are also likely to feel the impact. As benefits rise with inflation, more people on means-tested benefits will end up paying income tax. If the freezes continue, an extra 690,000 people on Universal Credit could be paying tax.
While the Treasury remains tight-lipped about the details, the anticipated freezes could secure an extra £39 billion for public coffers by the end of the decade. But at what cost to everyday taxpayers? Let us know how these changes could affect you and your budgeting plans.