Tax Thresholds: A Hidden Cost to Your Take-Home Pay?
Tax thresholds are the points at which you start paying more income tax and National Insurance on each extra pound you earn, as your salary rises. While governments have historically raised tax thresholds in line with inflation to ensure your take-home pay keeps up with the cost of living, the current freeze on thresholds has sparked controversy.
The freeze, introduced by former Conservative Chancellor Rishi Sunak in 2022, will remain in place until 2031. According to our calculations, this will add £465 to the 2030-31 income tax and National Insurance bill for someone currently earning £39,000, the salary of the average UK worker. This includes £227 due to the extended freeze announced by current Chancellor Rachel Reeves in November.
The impact is even more significant for those earning £50,000, who will pay an estimated £1,309 more, with £704 attributed to the extension from 2028-29. But why is this happening, and who is affected the most?
The Stealth Tax
Freezing thresholds is often called a stealth tax by economists because it increases the tax take without a government having to put up rates. Both Labour and Conservative governments have used it to raise additional revenue, which helps fund public services like the NHS, schools, and welfare spending.
Who's Affected?
Most earners will pay more due to the freeze, but those whose pay rises move them across the thresholds into the basic and higher rates are likely to see the biggest jumps in what they owe. The government's own analysis found that the lowest income households benefit, while the highest lose out.
The Numbers
By 2030-31, the Office for Budget Responsibility (OBR) estimates an additional 5.2 million people will be paying the basic rate of income tax due to threshold freezes introduced in 2022-23. An estimated 4.8 million more will be paying the higher rate, and 600,000 more the additional rate.
The freezes are projected to generate £56 billion in revenue in 2030-31, with £12 billion attributed to Chancellor Reeves' extension.
The Calculator
Our tax calculator estimates how much extra tax and National Insurance contributions (NICs) you will pay in 2030-31 due to frozen tax thresholds. It uses official forecasts produced by the OBR for the November 2025 Budget and estimates the extra amount you could pay compared to if thresholds had been allowed to rise from 2026-27.
What It Doesn't Take into Account
While the calculator provides valuable insights, it's important to remember that it doesn't account for various factors that can determine your tax bill. For example, it doesn't consider tax relief on pension contributions or NICs exemption for those over the state pension age.
Additionally, it applies only to employees working in England, Wales, and Northern Ireland, and does not cover self-employed workers or those in Scotland, who have different tax bands and thresholds.
How It Calculates Your Earnings
The calculator assumes your salary will rise in line with the OBR's financial year forecasts for average weekly earnings growth each year. It also assumes your salary remains regular. If it fluctuates or you change jobs, this could affect how your earnings rise.
How It Calculates Tax Thresholds
The calculator uses the same Consumer Prices Index (CPI) inflation figures the OBR uses to estimate future tax threshold increases. Actual inflation could vary.
The personal allowance (PA) is rounded up to the nearest £10, and the basic rate limit is rounded up to the nearest £100. The additional rate threshold rises in line with the PA, meaning your PA goes down by £1 for every £2 you earn over £100,000.
