The analysis reveals that the freezing of tax thresholds has resulted in an additional seven million individuals being brought into the income tax system. In the tax year 2025/26, the number of income taxpayers reached 40 million, marking an increase of 1.3 million within a year and a total of 7 million since the thresholds were last frozen in 2021/22.
Currently, the personal allowance stands at £12,570, determining the amount one can earn before being subject to taxation. Earnings exceeding this threshold are taxed at the basic rate of 20%. The higher rate of 40% applies to income surpassing £50,270, while the additional rate of 45% is levied on earnings exceeding £125,140.
During her Budget announcement in November, Rachel Reeves extended the freeze on tax thresholds for an additional three years, indicating that there will be no increase until 2031.
The phenomenon of tax threshold freezing, known as fiscal drag, leads to more people moving into higher tax brackets over time as their incomes rise. This practice is also referred to as a stealth tax, enabling the government to collect more revenue without officially raising tax rates.
The trend of increasing the number of income taxpayers is expected to persist until the freeze concludes. Sarah Coles, the head of personal finance at AJ Bell, advises exploring strategies to minimize income tax payments, such as making pension contributions to benefit from tax relief at the highest marginal rate or utilizing Cash ISAs to shield savings interest from taxation. Additionally, investing in Stocks and Shares ISAs can protect against dividend and capital gains tax implications resulting from changing tax brackets.
Furthermore, there was a rise of 5,000 estates liable for inheritance tax in the last tax year, bringing the total to 32,000 estates in 2025/26, compared to the levels in 2020/21. The number of estates subject to inheritance tax at death is projected to increase by 10,500 in 2027/28.
Ms. Coles emphasizes that while inheritance tax mainly impacts those leaving substantial estates, it is worth considering making lifetime gifts to reduce potential tax liabilities, especially with 5,000 more estates facing tax bills annually compared to the previous year.
