Major Budget tax update that affects millions of workers - and what it means for you

Chancellor Rachel Reeves has confirmed she will not extend a freeze on tax thresholds - in a shock Budget move for that will affect millions of workers.

The current freeze on tax thresholds - which is the point at which you start to pay tax - is due to last until April 2028. It had been widely reported that the Chancellor could increase this by a further two years until April 2030 - but she confirmed in her Budget today that she has decided against this.

This would have meant more people will be dragged into paying tax for the first time, or paying a higher rate of tax when their wages rise. This process is known as "fiscal drag" as more of your wages end up being subject to tax without tax rates actually rising. The Institute for Fiscal Studies previously estimated that 400,000 would have been dragged into paying Income Tax for the first time, while another 600,000 people would have started paying the higher and additional rates.

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There is a personal allowance of £12,570 a year before you start to pay tax . On earnings above this amount, you pay the 20% basic rate of Income Tax. There is a higher rate of 40% which is paid on earnings above £50,270, while anything above £125,140 is taxed at the 45% additional rate.

These thresholds normally rise in line with inflation, meaning when people get a pay rise, the point at which they are dragged into paying a higher rate of tax also goes up - but these thresholds have been frozen since 2021. These rates apply in England, Wales and Northern Ireland. Scotland has a separate tax system.

Once you earn more than £100,000, you also start losing the £12,570 tax-free personal allowance at a rate of £1 for every £2 that your income goes above £100,000. Employees also start to pay 8% on earnings above £12,570 a year in Class 1 National Insurance contributions. You pay 2% on earnings over £50,270. There are different rates for those who are self-employed.

Labour previously described the freeze as a "stealth tax on working people" when it was announced by then-Chancellor Rishi Sunak shortly after the pandemic. Government sources previously said that extending the freeze would not breach the Labour manifesto pledge to "not increase taxes on working people" as the rates of Income Tax will remain the same.