Legislation is in place to increase the personal allowance and the income tax thresholds in line with inflation each year. However, the previous government disapplied this legislation for tax years 2022/23 to 2027/28. At Budget, the government confirmed that it would extend the freeze to 2028/29, 2029/30 and 2030/31.
What does this mean?
When combined with factors such as inflation, wage growth and the state pension triple lock, the policy of freezing allowances and thresholds means that most taxpayers pay more in income tax. This is often referred to as “fiscal drag”.
Additional tax liabilities
If the personal allowance had been adjusted in line with inflation, it would be £15,480 for 2025/26, a difference of £2,910. As a result, taxpayers with incomes of £15,480 or more will pay at least £582 more in income tax for 2025/26.
In addition, more people will have to pay tax at the higher or additional rates than would otherwise have been the case. It is estimated that as a result of this policy an additional 2.8m people will pay tax at 40%, rather than 20%, on part of their income in 2025/26 .
The OBR estimates that, for 2030/31, the personal allowance would be £4,920 higher and the higher-rate threshold £20,120 higher if they had been increased with inflation.
The announcement of a three-year extension to the policy of freezing the personal allowance and thresholds is expected to raise additional tax revenues of £22bn. However, the cumulative effect of freezing the personal allowance and the tax thresholds for 2022/23 onwards means that the government expects to collect additional tax receipts of £55.5bn in 2030/31 alone. The figures are even higher when the effects of freezing national insurance thresholds are included.
ICAEW’s view
Katherine Ford, Technical Manager – Personal Tax, ICAEW, said: “Freezing the personal allowance means that more people are brought into the tax system, many of whom will be pensioners as the state pension continues to rise, adding to already considerable strain on HMRC. We look forward to seeing the details of the Government’s proposal to keep those with only small amounts of tax due on their state pensions out of Simple Assessment in future years.”
“It is important that HMRC has the resources it needs to give taxpayers the help they deserve. We will continue to work with HMRC to ensure that all taxpayers are able to meet their tax obligations in a timely and efficient manner.”
What is the personal allowance?
The personal allowance is the amount of income a person can earn for a tax year without having to pay income tax. It is set at £12,570. The personal allowance is reduced if income exceeds £100,000 and is lost entirely if income exceeds £125,140. The £100,000 threshold has not increased since it was introduced in April 2010. This means that many more people now have their personal allowance restricted or withdrawn and, as a result, pay tax at a high marginal rate on some of their income.
What are the personal tax thresholds?
Income tax is paid on non-savings, non-divided income of taxpayers in England, Wales and Northern Ireland at the following rates:
- 20%, for income above the personal allowance and up to the basic rate limit (£37,700);
- 40%, for income between the basic rate limit and the higher rate limit (£125,140); and
- 45%, for income above the higher rate limit.
The point at which a person first begins to pay tax at 40% is commonly referred to as the higher-rate threshold. This is the sum of the personal allowance and the basic rate limit: £50,270.
The Scottish government sets the rates of income tax on non-savings, non-dividend income of Scottish taxpayers. The basic and higher rate thresholds also apply for calculating income tax on savings and dividend income for taxpayers across the UK. The Scottish Budget will be delivered on 13 January 2026.
Other income tax changes
The government also announced an increase of 2 percentage points in the rates of income tax on savings, property and dividend income. Find more information here.
Further information
ICAEW on the Budget
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