HMRC warning as pensioners face tax hit over £700 next year

This weekend marks five years since income tax thresholds were frozen at 2021 levels. The policy was originally due to end in April 2026 but will now remain in place until 2031.

New figures show the freeze will pull more than 6 million additional people into the income tax system by the end of the decade.

The personal allowance is still fixed at £12,570, while the higher rate threshold remains at £50,270, unchanged since Rishi Sunak introduced the policy as Chancellor.

"The taxman will be getting out the bunting to celebrate the 5th birthday of the tax raid on workers, pensioners, savers and investors," said Charlene Young, senior pensions and savings expert at AJ Bell.

By the time thresholds start rising again in April 2031, the income tax system will have been frozen for a full decade, affecting millions of workers and pensioners across the UK.

The cost to taxpayers is continuing to rise each year. Basic rate taxpayers could pay up to £700 more next year as a result of the freeze, while higher rate taxpayers could face increases of up to £3,500 on their annual tax bills.

By 2030/31, basic rate taxpayers are expected to be paying around £960 more than they would if thresholds had risen in line with inflation.

Ms Young continued: "Every single taxpayer with earnings over £12,570 is impacted by the freeze, although by exactly how much depends on your earnings.

"That includes those with salaried earnings as well as pensioners receiving taxable income in retirement. It also impacts savers with cash interest that exceeds their combined personal allowance and savings allowance, as well as investors and company directors with dividend income in excess of their personal allowance and dividend allowance in fact those with dividend income have endured a triple whammy: frozen income tax thresholds; a reduced dividend allowance and now higher tax rates from April."

The amount raised through the freeze has risen sharply. Early estimates suggested it would bring in an extra £8billion a year by now, but forecasts now point to revenues exceeding £50billion a year by 2030/31.

The policy has been extended by three successive Chancellors. Rishi Sunak introduced the freeze at his March 2021 Budget as a way to repair public finances after the pandemic.

Jeremy Hunt later extended it to 2028, before Rachel Reeves pushed it further to 2031 at the 2025 Budget, despite previously warning that continuing the freeze would harm working people.

"Like bedraggled school children sent on a cross country run only to be dispatched on another punishing lap by their sadistic school teacher, taxpayers have seen the finishing line on the tax freeze marathon extended to 2031," Ms Young observed.

The mechanism behind this mounting tax burden operates through fiscal drag, where static thresholds combined with rising wages pull more earnings into higher tax brackets.

Someone on £35,000 at the start of the freeze can anticipate earning roughly £53,000 by 2030/31 if their pay keeps pace with typical wage growth.

Under an inflation-adjusted system, their cumulative tax bill over this period would total around £59,600, but frozen thresholds will add approximately £6,500 in extra taxation.

The policy's reach extends to every taxpayer earning above £12,570, encompassing salaried workers, pensioners with taxable income, savers and investors.

When Mr Sunak first introduced the freeze, the OBR predicted 1.3 million additional people would become taxpayers.

Current forecasts suggest over six million will be drawn into the income tax system, with 4.8 million more paying the 40 per cent rate by 2030/31.