The Autumn Budget announcement is always a big day in the UK’s financial calendar, and this year was no exception. In the hours leading up to the Chancellor’s speech, there was plenty of speculation-fuelled even more by a last-minute leak from the Office for Budget Responsibility (OBR) about the details of the budget. Social media buzzed, news outlets scrambled to interpret the hints, and many people wondered what surprises might be in store.
As the Chancellor took to the dispatch box just after lunchtime, the country tuned in to hear what would change for the years ahead.
There was a lot announced in the budget, which we covered in a deep dive here, but here is a snippet of one of the key topics.
Income tax thresholds frozen
What are they?
Income tax thresholds are the levels of income at which you start paying different rates of tax. As your income rises above certain thresholds, you pay a higher percentage in tax. These thresholds are usually reviewed and sometimes increased to keep up with inflation.
What’s changed?
Before this Budget, the main income tax thresholds had already been frozen at their 2021/22 levels and were due to remain unchanged until April 2028. This meant the Personal Allowance (the amount you can earn before paying any income tax) was set at £12,570, and the higher rate threshold (where you start paying 40% tax) was set at £50,270. The additional rate threshold (where you start paying 45%) was £125,140. These thresholds had not been rising with inflation or wage growth, so more people were gradually paying more tax as their incomes increased.
The Government announced that these income tax thresholds will now remain frozen for an extra three years, until April 2031. This means:
- The Personal Allowance stays at £12,570 until April 2031.
- The higher rate threshold stays at £50,270 until April 2031.
- The additional rate threshold stays at £125,140 until April 2031.
This freeze also applies to the equivalent National Insurance thresholds for employers and the self-employed.
Why it matters
Over time it means a larger share of your income could go to tax, even if tax rates themselves haven’t changed.
If you’re working, your pay will hopefully increase over time, in line with inflation. But because the income tax thresholds are frozen and not rising with the cost of living, you’ll find that more of your pay ends up being taxed— even if your income is just keeping up with inflation.
This effect is sometimes called “fiscal drag”. Here’s how it works in practice:
Example 1: Average earner
- Let’s say you earn £35,000 a year. If your salary goes up by 4% (roughly in line with recent inflation), you’d earn £36,400 next year. Because the Personal Allowance (the amount you can earn before paying tax) is frozen at £12,570, all of that pay rise is taxed at 20%. You’ll pay an extra £280 in tax, just because your pay went up with inflation.
Example 2: Mid earner
- If you earn £60,000 a year, a 4% pay rise takes you to £62,400. The higher rate threshold (where you start paying 40% tax) is frozen at £50,270. More of your income is now taxed at 40%, so you’ll pay even more extra tax- about £856 more, just from your pay keeping up with inflation.
Example 3: High earner
- If you earn £120,000 a year, a 4% pay rise takes you to £124,800. The higher rate threshold (where you start paying 40% tax) is frozen at £50,270. You’ve also lost part of your Personal Allowance for earning above £100,000. More of your income is now taxed at 40%, plus your Personal Allowance will fall from £2,570 to £170, so you’ll pay an extra £2,880 in tax, just from your pay keeping up with inflation.
Over time, as wages rise but thresholds stay the same, more people will move into higher tax bands, and everyone will pay a bigger share of their income in tax- even if tax rates themselves haven’t changed. This is why the Government expects to raise billions more in tax over the next few years, without increasing the tax rates.
What Should You Do Now?
For most people, this Budget doesn’t require urgent action or a change of course. If you’ve been waiting for clarity before making financial decisions, you can continue with your plans. However, it’s important to recognise that, while there are few immediate changes, the impact of frozen allowances and future tax rises will build up over time.
For most, the best approach is to stay on track, keep your plans under review, and be aware of how gradual changes may affect you in the years ahead.
Need Advice?
With so many moving parts and individual circumstances, we believe in the value of independent, ongoing financial planning. If you don’t already have regular reviews, or if you’re unsure how these changes might affect you, please get in touch for a personal review. For clients who already benefit from our ongoing service, we’ll be happy to discuss the details and implications at your next annual review.
Remember: The best financial decisions are made with up-to-date, factual information and tailored advice. If you have questions or want to discuss your financial plan, we’re here to help.
Disclaimer
This summary is provided for general information purposes only and does not constitute personal financial advice, a recommendation, or guidance to make any financial decisions. The content is based on information available at the time of writing, including official Government announcements and reputable sources. Some measures discussed may be subject to further consultation, may not be implemented immediately, or could change as legislation develops.
Tax rules, allowances, and rates are subject to change and may vary depending on your individual circumstances and where you live in the UK. The impact of any changes will differ from person to person. You should not make financial decisions based solely on this summary. We strongly recommend seeking personalised, independent advice before taking any action in response to Budget announcements.
Past performance is not a reliable indicator of future results. The value of investments and the income from them can go down as well as up, and you may not get back the amount you invest.
