UK income tax thresholds frozen for three more years, affecting take-home pay

The UK government has decided to freeze income tax thresholds, including the personal allowance and higher rate thresholds, for an additional three years, according to a BBC Business report citing the Office for Budget Responsibility (OBR).

This freeze means that the point at which people start paying income tax and the point at which they pay a higher rate will not increase with inflation until after 2031, continuing a policy that has been in place for five years.

The effect of this policy is that more income is subject to tax over time, which reduces take-home pay. This approach has been used by successive chancellors, including Rishi Sunak, as a way to raise additional revenue without increasing headline tax rates.

The additional revenue generated from this freeze has been allocated to public services such as defence, the NHS, schools, and support for vulnerable groups including the sick, disabled, and elderly.

The freeze particularly impacts those with incomes near the tax thresholds and anyone receiving a pay rise who earns above the personal allowance of £12,570, as they effectively pay more tax than they would if thresholds rose with inflation.

The OBR documents indicate that after 2031, the government plans to allow thresholds to increase again with inflation, which would enable taxpayers to keep more of their earnings.