Tax thresholds will stay frozen for now - and what that means for your pay

Income tax thresholds, which have been held steady by successive chancellors, are set to remain at current levels until April 2031. After that, they are expected to begin rising again in line with inflation.

That end point was not highlighted in the Budget speech, but documents published by the Office for Budget Responsibility (OBR) show the freeze is due to finish. The policy has reduced take-home pay for many people over the past five years.

For the next four years, the share of income taken in tax will keep increasing because of earlier Budget decisions. Once the freeze ends, the personal allowance - the amount you can earn before paying income tax - and other thresholds for higher rates should move up with inflation, leaving more of your earnings in your pocket.

Keeping thresholds unchanged is often described as a stealth tax because it raises revenue without increasing the headline tax rates shown on a payslip. Chancellors from Rishi Sunak onwards have used it as a way to raise extra funds for spending on defence, the NHS, schools, and support for the sick, disabled and elderly.

The extra revenue raised by the freeze has climbed each year and is forecast to reach £58bn by 2030-31, more than the government spends on transport and not far below current defence spending.

Who does the freeze affect?

The biggest impact is on people whose income sits near a tax threshold, but anyone who receives a pay rise is affected as long as they earn enough to pay tax. Those earning under £12,570 - the personal allowance level - pay no income tax.

By 2031, the OBR says an extra 6.8 million people will be paying tax who would not have done so if the personal allowance had increased with inflation.

The state pension is currently just below the personal allowance, and pensioners appeared set to become taxpayers from April, when the basic state pension rises to £13,036. However, the chancellor is introducing a separate Pension Tax Allowance so that low-income pensioners with income up to the value of the full new state pension will not pay income tax.

The personal allowance applies across the whole UK, so people in Scotland are also affected, although the tax bands there differ. National Insurance Contributions are based on the same thresholds.

How does it work?

Pay usually rises over time to keep up with living costs. In normal times, tax thresholds would rise too, broadly tracking inflation. That is not happening here, because the thresholds have been frozen at 2021 levels.

As wages increase, a larger share of earnings falls above the point where tax starts.

If the personal allowance had risen with inflation over the past five years, the first £16,070 of your salary would now be tax-free. Instead, income above £12,570 is taxed at 20%.

Will I pay the higher rate?

Frozen thresholds also pull more people into the 40% higher-rate band as earnings rise.

The OBR estimates that an extra 5.4 million people will be higher-rate taxpayers by 2031 because of the freeze.

If thresholds had kept pace with inflation, you would need to earn £64,470 this year before moving into the higher-rate band. As things stand, the 40% rate applies to income above £50,271.

If you already earn more than the threshold and then receive a pay rise, a bigger portion of that extra income will be taxed at the higher rate. By 2031, the government's official forecaster says almost one in four taxpayers will pay some tax at the higher rate.

The same logic also applies to the additional 45% rate, which kicks in on income above £125,140.

Will I be better off after 2031?

With wages having risen sharply in response to inflation in recent years, the effects of the first five years of the freeze have been noticeable, and that is expected to continue.

The Institute for Fiscal Studies says that if the personal allowance had been unfrozen now rather than kept in place until 2031, basic-rate taxpayers would save up to £198 a year in tax, while higher-rate taxpayers would save £395 a year.

For many people in the middle of the earnings range, however, cuts to National Insurance Contributions introduced in 2024 have offset some of the higher income tax bill.

How much difference a future unfreezing makes will depend on wage growth at the time. There is no fixed rule about the correct level for thresholds. Before the financial crisis, the personal allowance was much lower than it is now, and it was allowed to rise until the pandemic. Even by 2031, workers will still be able to keep a larger share of their earnings before paying income tax than they could in 2008.