Income Tax threshold freeze: What is the real impact and how can you mitigate it?

The Chancellor has confirmed one of the most widely anticipated Budget measures: a long-term freeze to Income Tax thresholds. This extends the current freeze by a further three years, locking thresholds in place until at least 2030/31.

Is this a change in direction from previous announcements?

Yes. Last autumn, the Chancellor stated that the threshold freeze would not be extended. The Autumn Budget 2025 reverses that position – a politically significant shift, but one that delivers substantial, long-term revenue for the Treasury.

How much more tax might people pay?

The impact of the freeze is immediate and substantial. While the exact effect depends on individual circumstances, early modelling shows:

Someone earning £50,000 could pay around £8,000 more tax over the three years from 2028/29 to 2030/31 compared with a scenario where thresholds rose with inflation.

This underlines how significant the measure will be for middle-income taxpayers in particular.

However, this is a change that will impact all taxpayers. Indeed, as the Chancellor acknowledged in her statement, ‘I am asking everyone to contribute’.

What Income Tax thresholds are being frozen?

All the main income tax thresholds will remain unchanged until at least the 2030/31 tax year, including:

Personal Allowance (£12,570)

Higher rate threshold (£50,270)

Additional rate threshold (£125,140)

These thresholds will now not increase until 2031/32 at the earliest.

Why does freezing tax thresholds increase the amount of tax people pay?

Even though the tax rates are unchanged, salaries tend to rise with inflation. When the above thresholds are frozen this has the following implications:

More individuals begin paying basic rate tax as their income may exceed the Personal Allowance for the first time

As their earnings increase, more people will move into higher and additional rate bands

This phenomenon, known as ‘fiscal drag’, is often described as a stealth tax by commentators as it increases the overall tax take without increasing the headline rates.

How many taxpayers will be affected?

According to the Office for Budget Responsibility (OBR), the threshold freeze is expected to raise £12.7bn for the Treasury by the end of the 2030/31 tax year.

The OBR also estimates that by 2029/30:

780,000 people will start paying basic rate tax

920,000 will move into the higher rate band

4,000 will move into the additional rate band

By 2030/31, around 24% of taxpayers will be paying higher or additional rate tax – up from 15% in 2021/22.

Does the threshold freeze affect more than just your salary?

Yes, the knock-on effects extend across several other taxes and allowances as follows:

Savings

Taxpayers may receive up to £1,000 of interest and not have to pay tax on it depending on what income tax band they fall into. This is known as the Personal Savings Allowance with the amounts available as follows:

Basic rate taxpayers receive a £1,000 Personal Savings Allowance.

Higher rate taxpayers receive £500 Personal Savings Allowance.

Additional rate taxpayers do not receive a Personal Savings Allowance.

Therefore, if you fall into a higher tax band as a result of the freeze in thresholds your Personal Savings Allowance may be reduced or eradicated completely.

Dividends

Dividend tax increases as you move into higher tax bands. With the further 2% increase in the Basic Rate and Higher Rate Dividend Rates announced in this Budget, the impact could be significant if you fall into a higher band as a result of the freeze in thresholds.

Capital Gains Tax (CGT)

There are different rates of CGT depending on whether you are a basic rate taxpayer or a higher/additional rate taxpayer. Therefore, if you have capital disposals, and this threshold freezes pushes you into the higher rate band this could have an impact on the amount of Capital Gains Tax that you pay.

What can taxpayers do to mitigate the impact?

As explained above this decision affects earnings, dividends, savings, and capital disposals. Therefore, the options available to taxpayers to minimise your tax liability are limited. The best approach would appear to carry out a holistic review of your overall income position and individual circumstances and then consider your options. These may include:

Reviewing remuneration structure

For company owners, adjusting the mix between salary, dividends and other extraction methods such as pension contributions may deliver tax savings.

Planning around investment income

The timing of dividends, interest and gains may also help manage exposure to higher tax bands.

How can Price Bailey help?

Given the scale of the freeze and its wide-reaching implications, personalised tax planning is essential.

Our Tax Team are working through the updated legislation and can help assess your position, model the likely impact, and explore ways to mitigate the changes. If you would like tailored guidance, please get in touch with your usual Price Bailey contact, or contact us using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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