The UK’s income tax and national insurance system is quietly tightening its grip on workers and pensioners as the government’s freeze on thresholds drags millions more into paying higher rates of tax, a think tank has warned.
The Institute for Fiscal Studies (IFS) said extending the freeze for a further two years, to 2030, would deliver the Treasury an additional £8.3bn in that year alone, on top of the £42bn stealth tax rise already baked in under existing plans.
Most major thresholds have been held at their current levels since April 2023 and are due to remain unchanged until 2028, despite rising inflation.
The IFS said that the policy has implications for the overall shape of the tax system, altering who pays tax and how much. A combination of rising minimum wages and frozen thresholds is drawing more low-income earners into the tax system.
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Under an extension to 2029–30, a minimum wage worker would need to work just 18 hours per week to become liable for income tax, the lowest threshold since the minimum wage was introduced in 1999. The think tank warned that this would blunt the effect of pay rises for lower earners, as a larger share of each increase would be recouped by the Treasury.
Pensioners are also increasingly affected. For the first time since its creation, the full new state pension is set to exceed the income tax personal allowance in 2027–28. In 2022–23, just under half of those receiving the full new state pension paid income tax; by 2027–28, that share will reach 100%.
The IFS found that extending the freezes would also raise the number of income tax payers in families entitled to universal credit to 3.1 million, an increase of 110,000 over current plans and 690,000 more than if thresholds had not been frozen.
These households face particularly high effective marginal tax rates, with some keeping at most 32p of every additional pound earned once tax and benefit withdrawal are combined.
By 2029–30, the total number of income tax payers would climb to 42.1 million, nearly a million more than under the existing plan and more than 5 million above what it would have been without any freezes. The number of higher-rate taxpayers, those paying 40% or more, would reach 10.1 million, up 790,000 compared with current policy and 4.8 million more than if thresholds had kept pace with inflation.
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Matthew Oulton, a research economist at the IFS, said: “The freezes to personal tax thresholds have already represented a huge tax rise. Extending them would raise significant revenue in a broad-based and progressive way. It would increase tax on all employees working full-time, most working part-time, most minimum wage workers and many low-income pensioners.”