Millions of workers to get pay rise as Rachel Reeves reveals income tax threshold changes
MILLIONS of workers are set to get a pay rise as a freeze on income tax thresholds comes to an end, the Chancellor has announced.
Rachel Reeves had been widely expected to extend the freeze, which has been in place since 2021, in today’s Budget.
But in a surprise move, the thresholds will increase again after 2028, giving a boost to incomes.
You currently pay no income tax on the first £12,570, known as the personal allowance.
You then pay tax at 20% on income over this and up to £50,271.
Then, on earnings over that and up to £150,000, pay 40%.
The “trick and treat” Halloween package included:
- A freeze to fuel duty for a 15th consecutive year in a win for The Sun’s Keep It Down campaign
- A penny off a pint by cutting draught beer duty, but raising booze taxes on other drinks
- A gloomy forecast of sluggish growth in a blow to Labour’s flagship mission
- A stamp duty rise for second-home buyers of two percentage points
- A pay rise for millions as the minimum wage was increased by £1,400 a year
- A hike to a packet of cigarettes as smoking duties were raised
- A new tax on vapes ahead of the looming ban on disposable e-cigs
- Higher taxes on air passenger duty for private jets that hits the wealthy
- A benefits crackdown with Ms Reeves telling jobless Brits to “get back to work”
- An increase to the state pension of £473 next year through the triple lock
- An inheritance tax raid through freezing the rates people pay
- An increase to the Carer’s Allowance to give cash to 60,000 more carers
These thresholds usually rise each year in line with inflation but were frozen under the previous Conservative government until 2028.
An extension of the freeze would have meant that individuals earning between £20,000 and £35,000 a year would have been up to £366 worse off by 2030.
Similarly, those with an annual income of £60,000 would have faced a reduction of up to £1,099 by the end of the decade.
However, Chancellor Rachel Reeves said today: “The previous government froze income tax and National Insurance thresholds in 2021 and then they did so again after the mini-budget.
“Extending their threshold freeze for a further two years raises billions of pounds.
“Money to deal with the black hole in our public finances… … and repair our public services.
“Having considered the issue closely I have concluded that extending the threshold freeze would hurt working people.”
Frozen tax thresholds act as a “stealth tax,” allowing the government to collect extra revenue without raising tax rates.
As wages increase due to inflation or other factors, more people will find their incomes pushed into higher tax brackets.
This phenomenon, known as “fiscal drag,” leaves more people paying more taxes, thereby reducing their disposable income.
The threshold at which employees begin paying National Insurance has also been frozen at £12,570 per year.
And the Treasury has also confirmed that this level will be unfrozen in 2028.
Ms Reeves added: “There will be no extension of the freeze in income tax and National Insurance thresholds beyond the decisions of the previous government.
“From 2028-29, personal tax thresholds will be uprated in line with inflation once again.”
Unfreezing these thresholds means people will be able to earn more without paying more tax.
However, while this is positive news, millions will still find themselves paying more tax before the thresholds are adjusted.
Steven Cameron, pensions director at Aegon, said: “According to analysis by the OBR, the current freeze will see millions more people starting to pay income tax or paying at a higher rate – between 2022-23 and 2028-29.
“This set of threshold freezes means nearly 4million additional individuals will be expected to pay income tax, 3million more will have moved to the higher rate, and 400,000 more onto the additional rate.”
What is the personal allowance?
THE personal allowance is the amount you can earn each year tax-free.
In the current tax year – which runs from April 6 2024 to April 5 2025 – the figure is £12,570.
Any earnings above this threshold are taxed at different rates, depending on the income bracket.
However, this amount may be larger if you claim certain allowances, including a blind person’s allowance, marriage allowance and child tax credit.
Income tax also applies to money you make outside your job, not just your earnings.
But there are also some tax-free allowances on top of the personal allowance for these other sources of income.
If you are self-employed, you don’t have to pay tax on savings interest, dividends and the first £1,000 of income.
INCOME TAX RATES
You currently pay no income tax if you earn £12,570 or less.
On earnings between £12,570 and up to £50,270, you pay the basic income tax rate of 20%.
Wages of £50,271 and above are taxed at the higher rate of 40%.
The additional income tax rate, which applies to earnings above £150,000, is 45%.
The income tax thresholds generally rise yearly so that people can earn more without paying more tax.
These thresholds will rise again in now frozen until 2030.
What is National Insurance?
NATIONAL Insurance is a tax on your earnings, or profits if you're self-employed.
These contributions make you eligible for things like the state pension and certain benefits.
You’ll usually pay National Insurance Contributions (NICs) when you’re over the age of 16 and earning a certain amount.
You can see the amount of NICs you pay on your payslip.
If you’re employed, the company you work for deducts the tax and pays it to HMRC for you.
Self-employed individuals generally have to pay NICs themselves when completing a self-assessment tax return.
NATIONAL INSURANCE RATES
Most people now pay 8% NICs on any earnings between £242 and £967 a week.
This means if you earn more than £12,570 a year, you’ll start paying NICs.
You pay mandatory National Insurance if you’re 16 or over and are either:
- An employee earning more than £242 per week from one job
- Self-employed and making a profit of more than £12,570 a year
Plus, you have to pay 2% on anything you earn over £967 a week – or £4,189 per month.
The exact amount you pay will depend on how much you earn, as it’s a percentage of earnings between these amounts.
You can check how much National Insurance you’ve paid by visiting gov.uk/check-national-insurance-record.