Income Tax 'stealth' freeze explained and how Budget announcement could impact you

Reports suggest Rachel Reeves could use her Budget on October 30 to extend the freeze on Income Tax thresholds - thereby dragging more people into paying tax for the first time

Millions of people will pay more in Income Tax if Chancellor Rachel Reeves uses her Autumn Budget to freeze tax thresholds.

The current freeze is due to last until 2028, having been introduced by the previous Conservative government in 2022. However, reports from The Financial Times suggest Rachel Reeves could use her Budget on October 30 to extend this - thereby dragging more people into paying tax for the first time.

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. Here is what you need to know.

What is Income Tax?

Income Tax is paid on earnings when you earn above a certain threshold. You pay the basic rate of 20% Income Tax on earnings above £12,570 a year. 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 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.

Could Labour extend the Income Tax freeze?

It's been reported that Rachel Reeves is considering extending the current freeze on Income Tax thresholds by a further two years, until 2030. This would raise an additional £7billion for the Treasury. However, the process of freezing the thresholds mean more people will be dragged into paying tax - either for the first time, or paying more tax - when their wages rise.

This process is known as "fiscal drag". The Institute for Fiscal Studies estimates 400,000 would be dragged into paying Income Tax for the first time, while another 600,000 people would start paying the higher and additional rates.

David Denton, technical consultant at Quilter “While Labour may not increase income tax directly, it has been widely reported that the Chancellor is considering increasing the income tax take by stealth, freezing thresholds for an additional two years to the 2029/30 tax year. If wages increased by 3% each year, our calculations show that someone earning £60,000 today could expect to pay an additional £3,579 in income tax between the 2028-29 and 2029-30 tax years compared to if allowances had kept up with earnings."

Government sources told the BBC that extending the freeze would not breach the Labour manifesto pledge to "not increase taxes on working people". This is because the rates of Income Tax would remain the same. But as we've mentioned above, people would still pay more in tax when their wages increase. The Treasury does not comment on Budget speculation.

How about National Insurance - could this change too?

Rachel Reeves is said to be considering a hike to employer National Insurance contributions as part of her Autumn Budget. Under current rules, employers pay National Insurance at a rate of 13.8% on all earnings above £175 per week, or £9,100 per year - but reports suggest the Chancellor could be set to increase this rate.

Pension contributions made by employers are currently exempt from National Insurance. There are reports that suggest this could also change. Changes to employer National Insurance contributions would not directly impact people's payslips - but experts suggest firms may look to mitigate these costs with smaller wage rises or hiring freezes.