Hardworking Brits may face a stealth tax raid amid fears Chancellor Rachel Reeves could extend the freeze on tax thresholds.
Tax experts are sounding the alarm over concerns she will move to fill the black hold in Treasury finances by keeping a freeze on thresholds, effectively increasing tax burdens without altering headline rates.
The process, known as ‘fiscal drag,’ means more workers and pensioners will unwittingly find themselves paying more tax as wages, pensions and asset values rise.
The Chancellor has already confirmed that the freeze on inheritance tax (IHT) allowances will remain in place until 2030, while income tax thresholds will stay unchanged until 2028.
Critics fear that freeze on income tax thresholds, first introduced by the Conservatives in 2022, could also now be continued through to 2030.
Charlene Young, a pensions and savings expert at AJ Bell, said: “Frozen tax thresholds punish taxpayers behind the scenes. When wages and asset prices increase but tax bands don’t adjust for inflation, it results in higher tax bills.”
She added: “Employees face yet another year of rising tax burdens come April, despite no official increase in tax rates.”
By April 2025, Britons will be more than halfway through the planned freeze on income tax thresholds, yet there is growing speculation that Reeves could push the deadline even further in the upcoming Spring Budget.
The inheritance tax freeze is particularly punishing, as Young highlights: “Astonishingly, the main inheritance tax-free threshold will have remained unchanged for over two decades by the time the freeze is lifted in 2030.”
If the IHT allowance had been adjusted for inflation, Young estimates that the tax-free limit for a married couple would be closer to £1.1million by 2030 – significantly higher than the current nil-rate and residence nil-rate bands combined.
Meanwhile, pensions expert Steven Cameron, from Aegon, predicts that the upcoming March 26 Spring Statement will be silent on pensions but could hint at future tax policies. He warns that an extension of the freeze on personal allowances could drag even more pensioners into higher tax brackets.
Cameron said: “The Chancellor may well use the statement to set the ‘mood music’ for future tax and spending policies.”
While pensions may not take centre stage next week, the Government is expected to outline ‘radical plans’ in the coming months, with major reforms anticipated in the upcoming Pensions Investment Review and the summer’s Pension Schemes Bill.
