The Office of Budget Responsibility’s latest economic and fiscal outlook, published alongside the Spring Statement on 26 March 2025, shows how the policy to freeze personal tax thresholds is affecting tax revenues and the tax system.
The tax take (taxes as a share of GDP) was relatively stable during the period from 2010/11 to 2019/20, beginning and ending the period at 33.2%, but it has risen significantly following the pandemic. It is forecast to be 36.8% for 2025/26, an increase of 3.6 percentage points on 2010/11, and to peak at 37.7% in 2027/28.
Comparing the forecast tax take for 2025/26 with the tax take for 2010/11, the increase is largely due to a rise in receipts from income tax and national insurance contributions (NIC). The policy of freezing personal tax thresholds, which began under the previous government and is being continued under the current government, appears to have played a significant part in this.
The point at which individuals begin to pay income tax (the personal allowance), and the point at which individuals begin to pay tax at the higher rate of 40%, have been frozen at £12,570 and £50,270 respectively since April 2021. The freeze is expected to continue until April 2028 at the earliest.
Had those amounts been adjusted in line with inflation, the Office of Budget Responsibility (OBR) says that the personal allowance for 2025/26 would be £15,480 and the higher-rate threshold £62,080. Sticking with the 2021 figures is expected to raise additional tax revenues of £26.8bn for 2025/26.
In addition to generating additional tax revenues, the freeze on personal tax thresholds has increased the number of taxpayers and the number of taxpayers paying income tax at the higher and additional rates. The OBR estimates that frozen personal tax thresholds will mean an additional 3.4m people having to pay income tax, and an additional 2.8m people having to pay income tax at the 40% rate, for 2025/26.
More taxpayers, and more taxpayers with complex needs, is expected to place increased pressure on HMRC’s services. We explored the current state of HMRC’s customer service levels in an earlier Follow the numbers article.
Source: OBR
