Chancellor Rachel Reeves is being urged to raise tax rate thresholds as thousands of Britons are inadvertently paying more to HM Revenue and Customs (HMRC).
Concerns have been raised over Reeves possibly considering extending the freeze on tax allowances beyond 2028 as she prepares for next week's Spring Statement.
Analysts claim that this would accelerate the impact of fiscal drag, which is already pushing thousands of Britons into higher tax brackets. This "stealth tax" effectively increases tax burdens without changing headline rates.
With the Spring Statement set for March 26, there is growing speculation that the government may extend the current freeze on thresholds, which was originally planned to end in 2028.
Rachel Reeves is being urged to raise the tax rate thresholds to end a "stealth" raid on millions
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Ed Monk, an associate director at Fidelity International, highlights the severity of fiscal drag on taxpayers. "The tax burden is at its highest level since the Second World War and shows no signs of letting up," he said.
Monk's analysis highlights that had the £50,270 higher rate threshold kept pace with rising wages over the past two and a half decades, it would now be close to £75,000.
By 2028, this figure would approach £80,000 if thresholds had risen with wages. "Fiscal drag works by freezing tax thresholds so more of our income is dragged into higher tax brackets over time," Monk explained.
"By 2027, the IFS predicts one in four teachers will pay higher-rate tax, with one in seven adults classed as a 'high earner'," he added.
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Fiscal drag is dragging Britons into higher tax brackets GETTY Office for Budget Responsibility (OBR) records show that the number of higher-rate taxpayers will reach 7.2 million by 2027, up from just 2.9 million in 2000.
"Despite largely flying under the radar, fiscal drag has proved a favourite policy for successive governments," Monk notes.
He adds that people are "much more likely to notice a rise in the headline rate of income tax than the gradual squeezing of thresholds".
Monk illustrates this with an example of a worker named Sally who earned exactly the higher rate threshold in 2000. By 2025, her wages rose with average earnings to £74,986.
"In 2000, Sally paid no higher rate tax as her wages equaled the higher rate tax threshold. But now in 2025 she pays tax on 33 per cent of her income," he explains.
Despite receiving no real pay rise in purchasing power, a significant portion of her income now falls into the higher tax bracket.
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Speculation is rife that the Chancellor could extend the
GB NEWSAJ Bell pensions and savings expert, Charlene Young, explains: "Frozen tax thresholds punish taxpayers by stealth. When asset prices and wages rise but thresholds fail to track inflation, the result is higher tax bills."
"Employees face yet another year of frozen thresholds come April. It means another year when our tax bills are set to go up, despite the headline tax rate remaining the same," she adds.
Young notes there has been "speculation Government may yet look to extend the freeze again" in the upcoming Spring Statement.
Aegon's pensions director Steven Cameron warns the Chancellor may use the statement to "set the 'mood music' for the future direction of travel on tax and spending policy".
