Major tax update that affects millions of workers confirmed in Budget

Rachel Reeves has announced she will NOT extend the freeze on tax thresholds, in a move that may come as a surprise to millions of workers during today's Budget. The current suspension, which fixes the point at which individuals start paying income tax, is set to continue until April 2028.

There had been speculation that the Chancellor might push this out another two years to April 2030, but she confirmed today that she has opted against that path. This decision spares additional workers from being pulled into the tax net or from facing higher rates of taxation as their wages grow, an effect referred to as "fiscal drag", where more earnings become taxable without an actual increase in tax rates.

The Institute for Fiscal Studies had previously predicted that around 400,000 would have found themselves liable for Income Tax for the first time, with a further 600,000 moving up to paying higher or additional rates due to the freeze.

In the UK, you can earn up to £12,570 a year before paying any Income Tax – this is known as the personal allowance. Above this threshold, earnings are taxed at a basic rate of 20%.

Earnings exceeding £50,270 fall into the higher tax bracket of 40%, and any income above £125,140 incurs the top additional rate of 45%.

Normally, these thresholds increase in line with inflation, so when individuals receive a pay rise, the point at which they're pulled into a higher tax bracket also rises. However, these thresholds have remained frozen since 2021.

The rates apply in England, Wales, and Northern Ireland, while Scotland has its own tax system. If you earn over £100,000, you start losing the £12,570 tax-free personal allowance at a rate of £1 for every £2 your income exceeds £100,000.

Employees also pay 8% on earnings above £12,570 per year in Class 1 National Insurance contributions and 2% on earnings over £50,270. Different rates apply to the self-employed.

Labour previously labelled the freeze a "stealth tax on working people" when it was introduced by then-Chancellor Rishi Sunak shortly after the pandemic. Government sources told the BBC that extending the freeze wouldn't breach Labour's manifesto pledge to "not increase taxes on working people" since Income Tax rates will remain unchanged.