UK Tax Threshold Freeze Could Push One Million More into Higher Rate

UK Tax Threshold Freeze – Another one million UK workers could be dragged into the 40% tax bracket as Chancellor Rachel Reeves faces mounting pressure to fill a £10 billion gap in public finances.

Despite previously ruling out an income UK tax threshold freeze beyond 2026, experts warn that stealth tax hikes could be introduced later this year. With economic growth stalling and increased defence spending on the horizon, speculation is growing over new fiscal measures in the Autumn Budget.

How Did We Get Here?

The roots of this stealth tax increase go back to Rishi Sunak’s decision in 2021 to freeze income tax thresholds for four years. This move pegged the higher-rate tax threshold at £50,271 until 2026, meaning that more workers pay higher taxes even if their real incomes haven’t risen—a process known as fiscal drag.

Jeremy Hunt later extended the freeze by two years, a policy Labour has kept in place. The Office for Budget Responsibility (OBR) initially estimated that this measure would generate £8 billion per year, but with inflation running higher than expected, it is now forecast to bring in £38 billion annually by 2030.

More People Paying Higher Taxes

The latest figures show that in 2023 alone, 680,000 workers were pushed into the 40% tax band, bringing the total to five million. If the current freeze continues until 2028, this figure will rise to nine million.

However, if Reeves extends the freeze by another two years, independent economists predict that the number of higher-rate taxpayers could reach 10 million by 2030—double the number from two years ago.

According to the Institute for Fiscal Studies (IFS), such an extension would add 600,000 more people to the higher and additional tax rates, while another 400,000 workers would start paying income tax for the first time as wage growth continues.

Why Might Reeves Extend the Freeze?

With a £10 billion hole in the UK’s finances, experts say Reeves faces limited options. Her own fiscal rules require that day-to-day government spending is covered by taxes, not borrowing, by the end of this Parliament.

Economist Sanjay Raja at Deutsche Bank said that extending the UK tax threshold freeze could be an easy way to generate revenue without officially increasing tax rates.

“Given rising defence costs, energy spending, and pressure on public sector pay, this type of stealth tax increase is likely in the Autumn Budget,” he warned.

The Real Cost of Fiscal Drag

The impact of fiscal drag has been dramatic. In 1997, the higher tax rate threshold stood at £30,200. If it had risen in line with inflation, today’s threshold would be £76,632 instead of £50,271. This means that millions more people are now paying 40% tax than originally intended.

The OBR will publish its latest economic outlook next week, alongside Reeves’ Spring Statement. It is widely expected to downgrade the UK’s growth forecast, particularly after the economy unexpectedly shrank in January.

UK Tax Threshold Freeze – What’s Next?

Reeves is expected to focus on cutting public spending and slashing red tape to balance the books, with reports suggesting she may implement welfare cuts of up to £6 billion.

She has also pledged to increase defence spending to 2.5% of GDP by 2027, but with Donald Trump’s stance on NATO creating uncertainty, experts believe the UK may need to spend even more on defence sooner than expected.

Despite a Treasury spokesperson confirming that income tax thresholds will not be frozen beyond 2026, experts remain sceptical. With a tight budget and increasing economic pressure, the reality is that stealth tax hikes could still be on the table later this year.