Analysis shows that the frozen tax thresholds have led to an additional seven million individuals being brought into the income tax system.
The number of income taxpayers in the 2025/26 tax year has risen by 1.3 million compared to the previous year, reaching a total of 40 million. This increase includes 7 million more taxpayers since the tax thresholds were last frozen in 2021/22.
Currently, the personal allowance stands at £12,570, indicating the amount one can earn before being subject to taxation. Earnings above this threshold are taxed at the basic rate of 20%. The higher rate of 40% applies to incomes exceeding £50,270, while the additional rate of 45% is triggered when earnings surpass £125,140.
Last November, in her Budget announcement, Rachel Reeves confirmed the extension of the freeze on tax thresholds for an additional three years, with no increases expected until 2031.
The practice of freezing tax brackets is known as fiscal drag, gradually pushing more individuals into higher tax brackets as their income rises over time. This method is also referred to as a stealth tax, as it enables the government to collect more tax without officially raising the tax rates.
The number of income taxpayers is projected to continue increasing throughout the duration of the freeze period.
Sarah Coles, the head of personal finance at AJ Bell, emphasized the importance of exploring strategies to minimize income tax payments, such as making pension contributions for tax relief at the highest marginal rate. Utilizing a Cash ISA can safeguard savings interest from taxation, while a Stocks and Shares ISA can protect investments from dividend and capital gains tax implications resulting from changes in tax brackets.
Furthermore, an additional 5,000 estates became subject to inheritance tax in the last tax year, bringing the total to 32,000 estates liable for inheritance tax in 2025/26, an increase of 5,000 since the rates were set in 2020/21. The number of estates expected to pay inheritance tax upon death is forecasted to rise by 10,500 in 2027/28.
Ms. Coles noted that although inheritance tax predominantly impacts those with substantial estates, especially married couples leaving property to their children, the rising number of taxed estates suggests considering lifetime gifts to potentially reduce the tax burden.