A stealth tax is about to hit your wallet, and it's not what you think!
Tax thresholds, those seemingly innocent numbers, are about to play a sneaky role in your take-home pay. As your salary rises, these thresholds determine when you start paying more income tax and National Insurance. Here's the catch: they've been frozen, and this freeze will cost you.
Let's break it down. You enjoy a personal allowance of £12,570, tax-free. Beyond that, you pay 20% on earnings up to £50,270, and then 40% until you hit £125,140. Anything above that is taxed at 45%. But here's where it gets controversial: if you earn over £100,000, you start losing £1 of your personal allowance for every £2 you earn over that threshold.
Historically, governments have increased these thresholds to keep pace with inflation, ensuring your pay keeps up with the rising cost of living. However, thresholds have been frozen since 2022 and will remain so until 2031. This means your tax bill will increase without any change in your tax rate.
Our calculations reveal that, for someone earning the average UK salary of £39,000, the freeze will add £465 to their 2030-31 income tax and National Insurance bill. For those earning £50,000, it's an estimated £1,309 more. And this is the part most people miss: the extended freeze announced by Chancellor Rachel Reeves will account for a significant chunk of this increase.
Economists call this a stealth tax because it's a way for the government to increase tax revenue without actually raising tax rates. Both Labour and Conservative governments have used this tactic to fund public services like the NHS, schools, and welfare. Most earners will pay more due to the freeze, but those whose pay rises push them into the basic or higher tax rates will see the biggest jumps in their tax bills.
The government's own analysis shows that lower-income households benefit from the freeze, while higher-income households lose out. However, this analysis only goes up to 2028-29 and doesn't include the extended freeze period. According to the National Institute of Economic and Social Research, lower and middle-income households are the worst hit by the extension, in percentage terms.
The initial freeze was implemented in 2022 by former Conservative Chancellor Rishi Sunak, who paused thresholds until 2026. The Conservatives later extended this freeze for two more years, and Reeves then announced it would remain in place until 2031. By 2030-31, the Office for Budget Responsibility estimates that an additional 5.2 million people will be paying the basic rate of income tax due to these threshold freezes.
The OBR forecasts that the freezes will generate £56 billion in revenue in 2030-31, with £12 billion of that down to Reeves's extension. This is a significant amount of money, and it's coming straight from your pockets.
Our tax calculator estimates how much extra tax and National Insurance you'll pay in 2030-31 due to these frozen thresholds. It uses official forecasts from the OBR and assumes your salary will rise in line with their predictions for average weekly earnings growth. It's important to note that this calculator doesn't take into account various other factors that can affect your tax bill, such as your age, pension contributions, and other taxes or credits you may be eligible for.
So, are you ready to see how much this stealth tax will cost you? Give our calculator a try and discover the impact of the threshold freeze on your finances. And remember, this is just one way the government can influence your take-home pay without you even realizing it. What are your thoughts on this stealth tax strategy? We'd love to hear your opinions in the comments!
