Budget 2024: How major tax update affects you if you earn £20,000, £30,000 or £40,000

In a surprise Budget move, Rachel Reeves confirmed she has decided against extended a freeze on the tax thresholds beyond the current 2028 deadline

Millions of workers will still pay thousands of pounds more in tax - despite Rachel Reeves confirming she won’t extend a freeze on tax thresholds.

The Chancellor was widely reported to be considering extending the current freeze on tax thresholds by a further two years, from 2028 until 2030. But in a surprise Budget move, Rachel Reeves confirmed she has decided against this. Tax thresholds typically rise in line with inflation, but they have remained frozen since 2021.

When the tax thresholds are frozen, more people get dragged into paying more tax - either by being dragged into tax brackets for the first time, or by moving into a higher tax bracket - in a process known as “fiscal drag”. 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.

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The Chancellor told MPs: “Having considered the issue closely, I have come to the conclusion that extending the threshold freeze would hurt working people. It would take more money out of their payslips. I am keeping every single promise on tax that I made in our manifesto. So there will be no extension of the freeze in Income Tax and National Insurance thresholds beyond the decisions of the previous government.”

But while the Chancellor did not extend the freeze as expected, she also did not cancel the freeze. This means millions of workers will still end up paying more tax by the time it ends in 2028. We asked money experts at AJ Bell to crunch the numbers and work out how much more it will cost you by 2028, depending on your salary before the freeze was introduced and based on average wage rises each year.

These figures show the difference in the expected annual Income Tax bill in the 2027/28 tax year, the final year under the current freeze, which will end in April 2028. The biggest impact is on someone earning £50,000, as they are on the cusp of the higher rate threshold where their earnings growth ends up being taxed at 40%.

• £20,000 salary

If you had a salary of £20,000 before the freeze kicked, you would pay an extra £684.50 by 2027/28.

• £30,000 salary

The current threshold freeze will add an estimated £685 to your tax bill in 2027/28.

• £40,000 salary

Someone who was paid £40,000 before the freeze will pay an extra £720 in tax in 2027/28.

• £50,000 salary

Higher earners would pay an extra £3,243 in tax in 2027/28 due to the current freeze.

Laura Suter, director of personal finance at AJ Bell, said: “Ahead of today’s Budget it was widely trailed that Labour would extend the freeze on income tax bands, which would have cost workers hundreds of pounds per year by the end of the freeze. But instead it has saved employees from another stealth increase in their tax bills by ending the freeze in 2028/29 as per the previous plan under the Conservatives.

“However, there’s not huge reason to rejoice as we’re still left with the legacy of the deep freeze on income tax bands. That six years of frozen thresholds can never be reclaimed, meaning that we’ve all missed out on chunky increases to tax bands during a period of high inflation and wage growth.”