Rachel Reeves has committed to ending the previous government’s income tax thresholds – but not until 2028. In the meantime, that means thresholds remain frozen, with the personal allowance set to £12,570 a year, where it has been since 2021
Thresholds are traditionally increased in line with inflation, which is currently at 1.7%. This means that while people’s salaries have been increasing every year, the tax thresholds have stayed still. As a result people pay more and more tax every year, creating a phenomenon known as ‘fiscal drag’.
For example, someone earning the average full-time salary of £37,430 a year will have a take-home pay of £26,560 once existing income tax and national insurance have been deducted. Had Rachel Reeves increased the thresholds by the current rate of inflation, then that person’s take-home pay would be £27,712.
That means they’re paying an extra £60 a year due to fiscal drag. You can find out how much fiscal drag is costing you by entering your annual salary here.
Ms Reeves, who stressed she was committed to helping “working people”, promised to end the freeze on income tax and national insurance thresholds.As earnings increase, maintaining the threshold freeze would have seen more people dragged into paying tax or shifted into higher bands.
“From 2028-29, personal tax thresholds will be uprated in line with inflation once again,” she said. “When it comes to choices on tax, this Government chooses to protect working people every single time.” It had been speculated before the budget that the freeze could be extended.