Millions of workers will still pay more in tax despite Chancellor Rachel Reeves making no major tax changes in her Spring Statement today. Tax thresholds are currently frozen until 2028 and there had been rumours that the Chancellor could extend this to 2030 in her Spring Statement.
Tax thresholds were first frozen by the previous Conservative government in 2021. They previously rose in line with inflation. In her speech today, the Chancellor did not announce any changes to tax thresholds, which means as it stands, they will remain frozen at their current levels until 2028.
The Chancellor had previously committed to one major fiscal event each year, so the absence of any tax updates was widely expected today – however, some analysts say she could still go on to extend the tax threshold freeze later this year in her Autumn Budget. When tax thresholds are frozen, it means millions of workers are dragged into higher tax brackets when they get a pay rise, or start a new job on higher pay.
This process is known as fiscal drag, as it generates more tax for the Treasury without having to actually change the rate of tax that is being paid. Here is how Income Tax works and how the current freeze could impact your wages going forward. Follow our Spring Statement 2025 live blog for the latest updates and to see how all the changes affect your money. What do you think of the Spring Statement? Email webnews@mirror.co.uk
Almost everyone in the UK has a personal allowance, which is the amount we can earn without paying any Income Tax. This is currently set at £12,570 a year. On taxable earnings above this amount, you pay the 20% basic rate of Income Tax. There is a higher rate of 40% which is paid on earnings above £50,270, while anything above £125,140 is taxed at the 45% additional rate.
Once you start to earn more than £100,000 each year, you lose 50p of your tax-free personal allowance for every £1 you earn above this amount. By the time your income reaches £125,140, your personal allowance has been wiped out. You are taxed based on the portion of your income where that tax bracket starts.
For example, if you were on a salary of £55,000, the first £12,570 of your salary would be tax-free, then you would be charged 20% on the portion between £12,571 and £50,270, then 40% on your earnings above £50,271.
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New research from Interactive Investor shows that, if the freeze is extended to 2030, the average earner on a salary of £35,000 could face a £416 higher Income Tax bill due to fiscal drag.
The additional tax burden rises to £1,248 and £3,612 for those earning £50,000 and £100,000, respectively. These figures assume a 5.8% increase in wages for the upcoming tax year (2025/26), based on the latest Office for National Statistics data, with wage growth continuing in line with the Office for Budget Responsibility annual inflation forecast until 2030.
Over the additional two-year period alone, the extra tax paid amounts to £223 for someone earning £35,000, £670 for those earning £50,000 and £80,000, and £1,939 for those earning £100,000.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, explained how people who are worried about being pushed into a higher tax bracket could consider using salary sacrifice to lower their tax burden. This is an agreement to reduce your entitlement to cash pay, usually in return for a non-cash benefit, such as pension contributions.
This reduces your taxable income, as your pension contributions are made before you’re taxed. She said: “As well as a reduction in Income Tax, salary sacrifice schemes also enable both employee and employer to pay lower National Insurance contributions (NIC), which makes pension saving even more tax efficient.
“Employees close to the £50,270 earnings threshold where the higher 40% tax rate kicks in could dip under it by using salary sacrifice pension contributions. Salary sacrifice can also be useful for those nearing the threshold for the 45% additional rate of tax at £125,140.”
The downside is, agreeing to a lower salary could impact your ability to access credit, such as a mortgage, and other employee benefits such as holiday, sickness and maternity pay may also be affected. Check with your employer to be sure of how salary sacrifice could affect you.
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