Budget 2025: The Consequences Of Fiscal Drag
The impact of freezing income tax bands and allowances and widens the tax base, whereas other measures, such as capital gains tax (CGT) rate increases, focus on raising revenues from a relatively narrow set of high-net-worth individuals.
Therefore freezing tax bands and allowances means that in practice by 2028/29:
1. 4.2million more individuals will pay income tax
2. 3.5million more taxpayers will be pushed into the higher-rate tax band
3. 0.6million will be dragged into the additional-rate tax band
By 2029/30 (IF indexation resumes in April 2028) the freeze is currently forecast to raise £48.9bn (1.4% of GDP) in that year. This forecast is sensitive to inflation and earnings growth: a single year of one percentage point higher-than-expected inflation would increase the yield by around £2.4 billion by 2029/30 (and vice versa). As a comparison, all the tax-raising measures in the Autumn 2024 Budget are projected to yield £41.2bn in 2029/30.
The Prime Minister has, over the summer, refused to rule out an extension of the personal tax freezes, arguing that “No Prime Minister or Chancellor is going to write a Budget in advance”. He has, however, stood by the Labour manifesto pledges of no increase to income tax, employee National insurance and VAT.
Whilst there appears room for the Chancellor to add another two years to the freeze, such a move will still be difficult politically for her. In the last Budget, Rachel Reeves said “having considered this issue closely I have come to the conclusion that extending the threshold freeze would hurt working people. It would take more money out of their payslips. I am keeping every single promise on tax that I made in our manifesto. So there will be no extension of the freeze in income tax and National Insurance thresholds beyond the decisions of the previous government. From 2028/29, personal tax thresholds will be uprated in line with inflation once again. When it comes to choices on tax, this government chooses to protect working people every single time.”
There is another potential snag for the Chancellor if she chooses to extend the income tax freeze beyond the next election date to April 2030: the amount raised will probably not be enough. The estimated 2029/30 revenue from an extended freeze is £7bn-£8bn a year. The hole created by the U-turns on Winter Fuel and disability benefits is £6.25bn, while there are suggestions that the Chancellor will need to find a total of £20bn due to a likely change in economic growth assumptions.
The personal tax freeze – even without an extension – has already been given the prize of the largest UK tax increase ever. The freeze could mean that from next April (and, if not then, April 2027), the increased New State Pension will be greater than the personal allowance.
What does all this mean for later life financial planning? Over the next few months in the lead up to the Budget on 26th November we will be providing insightful commentary and advice for those in later life. This can be best accessed reviewing our regular blog articles and commentary on the Harold Stephens website and social media channels. Follow this link for ‘Harold Stephens IFA’ on You Tube and subscribe to the channel to get the very latest videos direct from Richard Higgs, later life financial planning specialist.
Finally, register and reserve your place at one of our 2 post-budget Later Life Financial Planning live events to be held on Wednesday December 3rd 2025 by emailing office@haroldstephens.co.uk.