Taxpayers could face hundreds of pounds in additional income tax if the Government extends the freeze on tax thresholds until 2030, according to new calculations.
Chancellor Rachel Reeves is rumoured to be considering extending the current freeze, which is set to end in April 2028, for an additional two years.
The move would effectively create a "stealth tax" through fiscal drag - the phenomenon where inflation pushes wages higher while tax thresholds remain static. This causes more people to pay higher tax rates even when their real spending power hasn't increased.
The freeze on the personal allowance at £12,570 means that as wages rise with inflation, taxpayers will automatically pay more tax without any formal announcement of tax increases.
According to calculations by interactive investor, the average earner on £35,000 could face a £416 higher tax bill if the freeze is extended to 2030.
The impact increases dramatically for higher earners. Those on £50,000 could pay an additional £1,248 in tax. For individuals earning £100,000, the extra tax burden could reach a substantial £3,612.
State pensioners could be slapped with a stealth tax next year GETTY These projections assume wages will increase by 5.8 per cent for the upcoming tax year (2025/26), based on the latest ONS data.
The calculations further assume that wage growth will continue in line with the Office for Budget Responsibility's annual inflation forecast until 2030.
As wages rise but tax thresholds remain frozen, more workers will be pushed into higher tax brackets despite not experiencing any real increase in their purchasing power.
Looking specifically at the additional two-year period of the potential extension, the tax impact remains significant across income brackets.
Someone earning £35,000 would pay an extra £223 in tax during those two years alone.
For those on £50,000 or £80,000 salaries, the additional tax burden would be £670 over the two-year extension. The highest earners would face the steepest increases. Individuals earning £100,000 would pay an extra £1,939 in tax during the extended freeze period.
These figures highlight how fiscal drag creates an increasing tax burden even without formal tax rate changes. The cumulative effect of the threshold freeze becomes more pronounced the longer it continues.
While the annual impact may seem manageable to some, the total additional tax paid over multiple years represents a substantial sum for most households.
Myron Jobson, Senior Personal Finance Analyst at interactive investor, describes fiscal drag as "the stealthy tax grab that few see coming."
He continued: "As wages rise with inflation but tax thresholds remain frozen, more people find themselves paying higher tax rates - even if their spending power hasn't actually improved. It's like being quietly nudged into a higher tax band without ever feeling richer."
Jobson notes that with thresholds frozen, "millions will be caught in the net, making it a lucrative, if sneaky, way for the government to boost its coffers without making headline tax hikes. He suggests this approach fits into a broader fiscal strategy.
"On top of already announced cuts to welfare spending and civil service running costs, it appears that a bitter cocktail of spending cuts and (stealth) tax rises is on the table to restore public finances - even if the tax threshold freeze is not extended."
How to Beat Fiscal Drag with Pension Contributions
Boosting your pension contributions is one of the most effective ways to beat fiscal drag, according to Jobson.
He said: "Increasing your pension contributions isn’t just good for your retirement – it also lowers your taxable income, helping you stay out of higher tax bands."
Using salary sacrifice is especially useful, as it reduces both income tax and National Insurance. “It’s a double win – lower tax and more money in your pension," Jobson added.
For higher earners, pension contributions can help avoid the 60% effective tax rate that applies between £100,000 and £125,140, where the personal allowance is gradually withdrawn.
Parents may also benefit. Pension top-ups can help reduce adjusted net income and maintain eligibility for Child Benefit, Tax-Free Childcare, and Free Childcare schemes.
