The Chancellor said she made the decision “to protect working people from being dragged into higher tax brackets”.
The freezing of income tax thresholds was first implemented by the former Conservative Government in March 2021, when the threshold was frozen until 2026. It was extended two years ago until the 2028/29 tax year.
Income tax thresholds set the amount of money that people can earn tax-free or in the 20% basic rate band. Freezing thresholds when wages are increasing creates ‘fiscal drag’ – where some workers are dragged into higher tax bands via wage inflation.
Reeves said continuing the policy would “hurt working people” and “would take more money out of their payslips”. She announced that personal tax thresholds will now be uprated in line with inflation again from 2028/29.
Tom Stevenson, investment director at Fidelity International, said: “The main rates of income tax were left unchanged, as they had to be given Labour’s manifesto pledges. And there was further positive news on the thresholds at which workers start to pay higher rates of tax. These had already been frozen until 2028 but there was speculation that this would be extended for another two years until 2030.
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“The Chancellor said she had considered this but stepped back from yet more ‘fiscal drag’. This is a good thing. It is an effective way of raising extra revenue but stealthy and pulls more and more people on relatively modest means into a tax rate that used to be reserved for the wealthiest.”
However, as widely predicted, Reeves announced that National Insurance for employers will be increased by 1.2% to 15% from April 2025. The level at which employers start paying National Insurance on each employee’s salary will also be decreased from £9,100 per year to £5,000, raising £25bn per year.
