UK tax threshold freeze intensifies pressure on workers as reform debate grows

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UK tax threshold freeze pressure

Highlights

Frozen UK personal allowance at £12,570 is projected by OBR to generate £55bn additional tax revenue by 2030-31, with over 10mn over-65s now subject to income tax.
AJ Bell analysis estimates every £100 rise in the personal allowance would cost £1bn annually and primarily benefit earners up to £100,000, complicating the 60 per cent marginal tax band.
Over 100 Patriotic Millionaires urge a 2 per cent levy on assets above £10mn and CGT alignment, projecting £36bn annual revenue despite expert skepticism.

Frozen thresholds sharpen Budget pressure

As reported by Financial Times, pressure is building on the government to address the "cost of working crisis" created by frozen tax thresholds, even as expectations rise that the issue could surface in the autumn Budget.

The £12,570 personal allowance threshold has become a focal point because fiscal drag is raising tax receipts without changes to headline rates. OBR estimates cited in the article show the effect is on course to raise £55bn by 2030-31, while the full state pension now sits just below the threshold and the number of over-65s paying income tax has moved above 10mn.

Analysis by investment platform AJ Bell says every £100 increase in the personal allowance would cost about £1bn a year. But such a move would not only support lower earners and pensioners, it would also extend a benefit to everyone earning up to £100,000.

That creates complications further up the income scale. Any rise in the personal allowance would widen the 60 per cent marginal tax band above £100,000, where the allowance is withdrawn, and when national insurance and student loan repayments are added, the effective rate can climb to 71 per cent before dropping back at £125,140.

Work incentives and wealth tax options come into focus

The article argues these threshold effects are increasingly distorting behaviour, with some workers turning down overtime or promotions, or redirecting income into pensions to defer tax. It also points to interactions with childcare support and carer's allowance that can make working less financially rational for some households.

Tax expert Dan Neidle's analysis of 2022-23 tax data, cited in the article, found 32,000 taxpayers kept income below £100,000 and 230,000 stayed below £50,000, then the point at which child benefit started to be clawed back. The article suggests those figures are likely to have risen further after additional years of fiscal drag.

Possible responses range from cutting employers' national insurance contributions for under-25s to help job creation, to restoring a 50p top rate of income tax, though that is described as politically sensitive and potentially at odds with prior commitments. The piece also outlines broader alternatives such as a land value tax, changes to a proposed mansion tax threshold and inheritance tax reform.

A separate intervention this week comes from Patriotic Millionaires, a group of more than 100 UK-based millionaires, which urges the prime minister and chancellor to shift the focus toward taxing wealth and assets rather than income from work. The group calls for a 2 per cent levy on assets above £10mn and for capital gains tax to be aligned with income tax rates, arguing the measures could raise £36bn a year, though the article notes tax experts view that estimate as optimistic.

Our earlier report on Cranston, Rhode Island’s bond outlook explained why the city’s credit profile came under heavier scrutiny after its outlook was revised to negative. It focused on how rising spending, pension liabilities and elevated debt—without matching revenue growth—can erode fiscal flexibility and put a current rating at risk.

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