Tax Bills Set to Rise as Income Tax Thresholds Remain Frozen – Budget 2025 Impact
London, UK – Millions of UK taxpayers face higher tax bills as income tax thresholds remain frozen, a policy impacting personal finances and highlighted in the latest budget discussions. The freeze, initially implemented in 2021, means that as wages increase with inflation, more income is pushed into higher tax brackets, effectively reducing take-home pay despite nominal earnings growth.
Traditionally, income tax thresholds are adjusted annually to account for inflation, ensuring that tax brackets expand alongside earnings. However, the current freeze means individuals are paying tax at higher rates on income that would previously have been taxed at lower rates.
Here’s a breakdown of how the system works and the impact of the freeze:
Tax Thresholds (England, Wales & Northern Ireland – 2024/25)
* Personal Allowance: £12,570 (income below this is not taxed)
* Basic rate (20%): £12,571 to £50,270 (on earnings)
* Higher rate (40%): £50,271 to £125,140
* Additional Rate (45%): Over £125,140
For those earning over £100,000, the personal allowance is reduced by £1 for every £2 earned, disappearing entirely at £125,140. It’s crucial to remember that only income above a threshold is taxed at that rate; for example, someone earning £60,000 pays 40% only on the £9,730 exceeding the £50,270 basic rate threshold.
the Impact of the Freeze
The consequence of freezing these thresholds is that wage increases, even those simply keeping pace with inflation, can push individuals into higher tax brackets. This means a larger portion of their income is subject to higher tax rates, diminishing the real value of pay rises.
The Office for Budget Obligation (OBR) estimates that if the personal allowance had increased with CPI inflation since 2021, it would be £4,900 higher by 2030-31, and the higher-rate threshold would be £20,100 higher. The OBR projects the proportion of taxpayers paying higher or additional rate tax will rise from 15% in 2021-22 to 24% in 2030-31 due to the freezes.
Hargreaves Lansdown calculates that someone earning £50,000 will pay £8,165 more in tax between 2020 and 2031 as a direct result of the extended freeze.
Sarah Coles, head of personal finance at Hargreaves Lansdown, emphasizes the wider implications: “It’s not just the tax on earnings that’s affected. When you start paying higher rate tax, your personal savings allowance shrinks…You also pay a higher rate of capital gains tax…It means everyone, whatever their income, needs to consider the steps they can take to protect themselves.”
Historically, the personal allowance was increased by more than inflation by the Conservative government, taking 2.7 million people out of taxation by 2014-15. The higher-rate threshold was also typically adjusted in line with September’s inflation figure. The current freeze represents a meaningful departure from this previous approach.
