Workers on £35,000 hit by stealth tax adding up to hundreds | Personal Finance | Finance
Families on average salaries face being dragged deeper into the tax net if Rachel Reeves decides to continue the freeze on income tax thresholds, analysis has warned. A worker earning £35,000 in 2022 could be paying £926 a year extra in income tax if the freeze is extended from 2028 to 2030.
The freeze on tax thresholds was first imposed by the Conservatives in 2021-22 and then extended by them to 2028. In her first Budget, Rachel Reeves, indicated the freeze would be lifted in 2028. However the emergence of a black hole in government finances has triggered speculation it will now be extended for at least another two years.
The policy of holding personal allowance and income tax thresholds at current levels until 2028 is already raising billions through so-called “fiscal drag”, where rising wages push more people into higher tax bands. If Reeves extends the freeze to 2030, the stealth tax burden will intensify across all salary levels.
According to wealth management expert Rathbones, someone who was on £50,000 in 2022 would pay £4,632 more in tax by 2030. A person on £80,000 would be £5,635 worse off, and a £100,000 earner would hand over £7,077 more than if thresholds rose with inflation.
Ade Babatunde, senior financial planning director at Rathbones, said: “With the Chancellor searching for ways to plug the nation’s financial black hole, the freeze on income tax thresholds could be dragged out further. It’s taxation by stealth: the rates stay the same, but a bigger slice of your pay disappears into the taxman’s coffers.
“And it’s not just income tax. Capital gains, dividend and inheritance tax thresholds are also frozen, quietly pulling more people into the net. Coupled with inflation – and with talk of a wealth tax – the rising tax burden has fuelled a surge in clients asking if they can do more to reduce their liability ahead of the Budget.
“Households should prepare now. Maximising ISA and pension allowances, and increasing pension contributions can help offset the impact. Professional financial advice can ensure more of your money works for you.”
Even stopping the freeze at 2028 would leave significant extra costs: £3,964 for someone on £50,000, £4,488 on £80,000, and £6,476 for £100,000 earners.
The National Institute of Economic and Social Research has warned Reeves may be forced to raise taxes further to meet borrowing rules, with the government on course to miss its fiscal targets. Rathbones’ calculations suggest the freeze will raise £38 billion a year by 2029/30 – almost two-thirds of the UK’s entire defence budget for 2024/25.
