Rachel Reeves is freezing tax thresholds in an attempt to plug the hole in the public accounts. Find out how it affects your tax bill

The chancellor, Rachel Reeves, has announced that income tax thresholds will be frozen until the 2030-31 tax year.

Freezing tax thresholds results in “fiscal drag” – a phenomenon where people are dragged into higher tax bands when they get pay rises.

Until 2021, the UK income tax thresholds were typically increased each year in line with inflation. When the then chancellor, Rishi Sunak, delivered his budget that year he announced that thresholds would be frozen from April 2022 until 2026.

The Conservative government extended that freeze until 2028, and now Reeves has announced it will continue until 2030.

Here we explain how the changes work, and you can use our tool to find out how much more tax you will pay over the next five years as a result of the freeze. We have used the OBR’s forecasts for inflation and applied them to earnings and thresholds.

The final figure is the amount by which your tax bill will effectively be larger in 2030, compared to what it would have been if thresholds had moved with inflation. In each intervening year the increase would be smaller, but similar.

Figures for earnings above £100,000 take into account the loss of some or all personal allowance. We have left the £100,000 threshold unchanged.

Tax thresholds

These are the point where the tax rate on your income changes. In England, Wales and Northern Ireland the thresholds are the same.

Everyone has a personal allowance of £12,570, and below that income is not taxed. Income between £12,571 to £50,270 is taxed at the basic rate of 20% if it is on earnings. Income between £50,271 to £125,140 is charged at the higher rate of 40%, and anything over £125,140 is taxed at the additional rate of 45%. There are extra charges on savings and property income.

If you earn more than £100,000 once things such as pension contributions are taken into account, your personal allowance is reduced by £1 for every £2 you earn. By the time you earn £125,140 you will get no tax-free personal allowance.

It’s important to remember that it is only the income that is over a threshold that is taxed at that rate – if, for example, you earn £60,000, only £9,730 (£60,000 minus £50,270) is taxed at 40%.

Until 2021 the thresholds were typically increased in each year’s budget. The personal allowance was boosted by more than inflation by the Conservative government, and by 2014-15 the increases had taken 2.7 million people out of taxation. The threshold for higher-rate tax to kick in was typically increased in line with September’s inflation figure.

Read More: How does freezing income tax thresholds affect your own tax bill?