Labour Extends Income Tax Threshold Freeze Pulling More Workers into Higher Brackets

Rachel Reeves, the Chancellor, has extended the freeze on income tax thresholds for an extra three years beyond 2028, surpassing expectations and triggering significant revenue increases for the Treasury. Analysts from the Office for Budget Responsibility report that nearly 8.9 million individuals will be paying the higher 40 percent tax rate at the start of the next decade, a figure which more than doubles the 4.4 million affected when the threshold was first set at £50,270 in the 2021 to 2022 tax year.

This latest measure is expected to generate an additional £12.8 billion annually by 2030 to 2031, pushing the decade-long windfall from frozen thresholds to £66.6 billion each year. The policy is contentious due to Labour’s prior manifesto commitment not to “increase taxes on working people.” Government officials argue that the promise covers rates for National Insurance and income tax, not the thresholds themselves, therefore maintaining the letter of the pledge. Economic experts, including those at the Institute for Fiscal Studies, highlight that frozen thresholds constitute a substantial tax increase for workers and effectively drive more middle-income earners into higher tax brackets via fiscal drag.

Low income earners are not spared the effects. The OBR forecasts an additional 780,000 people will be brought above the £12,570 income tax threshold by the end of the decade. The overall number of income tax payers is on course to climb to 43.5 million in 2030 to 2031, compared to 33 million prior to the freeze’s introduction. Alongside this, National Insurance thresholds also remain on hold, broadening the overall impact on personal incomes.

The Chancellor’s Budget includes further measures; £4.7 billion will be raised by requiring National Insurance contributions on salary sacrifice payments into pension saving schemes, further diminishing advantages for savers. There will also be a further £2.1 billion in taxes levied on dividends, property, and income from savings, expanding the revenue base from personal investments and unearned income.

Labour’s approach has attracted protests from both taxpayers and observers concerned by the growing tax burden, given the earlier assurances of no rises for working people. The latest decisions form part of a larger £15 billion aggregate increase in personal taxation, intensifying debates over fiscal strategy and campaign promises in the UK.