In April 2021, the UK government implemented what many tax experts consider a stealth tax hike - freezing income tax and National Insurance thresholds until 2028.
The freeze was originally announced in the March 2021 Budget to run until 2025/26, and had then been extended in the Autumn Statement 2022 to run until 2027/28. Autumn Statement 2023 further extended the freeze on income tax thresholds until the 2028/29 fiscal year. Now there is a chance that the Spring Statement 2025 this month could see the freeze extended another year taking the frozen thresholds and their fiscal drag effect through to the end of the decade.
While not technically a tax increase, freezing tax thresholds has profound implications for millions of workers across the UK, especially given the periods of high inflation we've gone and are going through. Our calculator reveals just how much this policy affects your take-home pay and purchasing power over this decade.
When the government freezes tax thresholds, they're employing a tactic economists call fiscal drag<. As wages rise with inflation, more of your income gets pulled into higher tax brackets, while allowances remain fixed. The result? You pay more tax without Parliament ever voting for a tax increase.
In normal times, tax thresholds typically rise with inflation. When they don't, the government effectively gets an automatic tax increase each year. With inflation reaching 9.1% in 2022 and 7.3% in 2023, these frozen thresholds have pulled millions of additional people into paying higher taxes.
Our UK Tax and Inflation Impact Calculator allows you to see precisely how these frozen thresholds affect your specific situation from 2021 through 2030. By entering your gross annual income, you'll receive a detailed year-by-year breakdown showing:
- Your expected take-home pay under frozen thresholds.
- What your take-home pay would have been if thresholds had risen with inflation.
- The real purchasing power of your income after accounting for inflation.
- The exact amount of additional tax you're paying due to the threshold freeze.
What makes this threshold freeze particularly painful is that it coincides with a period of high inflation. Not only are you paying more tax as a percentage of your income, but that income buys less in real terms.
Our calculator reveals this double squeeze by showing your real purchasing power alongside your nominal income. For most people, despite receiving nominal pay rises, their actual standard of living is decreasing when both tax increases and inflation are factored in.
Planning for future finances is crucial for effective tax planning. Some considerations to reduce the impact of these types of stealth tax rises include:
- Pension contributions: These remain one of the most tax-efficient ways to save, as they reduce your taxable income.
- ISA allowances: Make full use of your annual £20,000 ISA allowance for tax-free investment growth. Though the ISA allowance may be reducing.
- Salary sacrifice schemes: These can provide NI savings for both employees and employers.
- Tax-efficient investing: Consider whether investments generating capital gains (taxed at lower rates than income) might be more advantageous than those generating income.
The government's threshold freeze is expected to bring in approximately £25 billion per year by 2028, helping to address public finances still recovering from the pandemic and energy crisis spending. However, this comes at a cost to household finances and potentially economic growth. As more income is directed to taxation rather than consumption or savings, there may be a dampening effect on the broader economy.