HMRC £700 tax alert as freeze bites with millions facing rising bills | Personal Finance | Finance

Millions of workers, pensioners and savers are being hit with a growing “stealth tax” as frozen income tax thresholds continue to bite.

The personal allowance before people start paying income tax has been frozen at £12,570, while the higher-rate threshold is at £50,270. If these figures had risen in line with inflation, the threshold for paying the basic rate tax of 20%, would have been around £18,500 today. And the threshold for paying higher rate tax at 40% would now be around £70,000.

The long-running freeze on tax bands was first introduced under the Conservatives in 2021, but it has now been extended through to 2031 by Labour. Charlene Young, senior pensions and savings expert at AJ Bell, said the policy has become a prolonged “tax raid” affecting virtually every taxpayer.

She said: “The taxman will be getting out the bunting to celebrate the 5th birthday of the tax raid on workers, pensioners, savers and investors.”

£700 hit – and rising

Analysis suggests basic-rate taxpayers could be paying up to £700.36 more in tax in 2026/27 due to the frozen personal allowance.

By the end of the freeze in 2030/31, that additional cost is expected to rise to around £960, depending on wage growth and inflation.

The impact is far more severe for higher earners with higher-rate taxpayers paying up to £3,500 more next year because of the freeze.

How the squeeze works

The policy relies on so-called “fiscal drag”, where thresholds stay fixed while incomes rise. That means more people are pulled into paying tax and existing taxpayers are pushed into higher bands

For example:

• A salary of £35,000 could attract nearly £4,500 in tax under frozen thresholds, compared with around £3,500 if allowances had risen with inflation
• A £75,000 salary sees tax of about £17,400, versus roughly £12,600 is the threshold had risen each year under an indexed system.

£50bn-a-year tax take

What began as a relatively modest revenue raiser has ballooned dramatically. Initially, the threshold freeze, introduced by the then Conservative chancellor Rishi Sunak, was expected to raise £8bn a year. It is now forecast to generate over £50bn annually by 2030/3.

The increase reflects a combination of higher wages, inflation and policy changes, including the reduction in the additional-rate threshold, where the tax rate rises to 45%, to £125,140.

Millions dragged into tax

The number of people affected has surged far beyond original expectations.

Latest estimates suggest more than 6 million extra people will be paying income tax by 2030/31.

At the same time, around 4.8 million more will be pushed into the higher-rate band

Who is affected?

The freeze hits anyone earning above the £12,570 personal allowance, including:

• Employees
• Pensioners with taxable income
• Savers earning interest above allowances
• Investors and company directors receiving dividends

Dividend investors have been particularly affected, facing a combination of frozen thresholds, reduced allowances and higher tax rates.

A decade-long squeeze

The freeze was first introduced by Rishi Sunak in March 2021 as a temporary measure to repair public finances after the pandemic.

It was later extended by Jeremy Hunt and then pushed out further to 2031 by Rachel Reeves, despite earlier indications the policy would not be prolonged.

That means income tax thresholds will remain stuck at 2021 levels for a full decade, locking in a sustained rise in the tax burden without any headline rate increases.