Plans to freeze personal allowance billed as 'stealthy' tax rises

She could also bring in a new levy on high-value properties, in the measures to be announced on November 26.

The Chancellor had been expected to raise income tax in the face of a yawning gap in her spending plans, hinting as recently as Monday that the alternative would be “deep cuts” to public investment.

But she has ditched the plan, which would have broken a Labour manifesto promise, prompting speculation that she may have to raise money more quietly, with what accountant Filip Filev of leraccountancy.co.uk describes as "the stealth £10 billion".

What would freezing the personal allowance mean for income tax?

Filip says: "The personal income tax allowance (£12,570) and the higher-rate threshold (£50,270) are both expected to stay frozen well beyond 2028, possibly through to 2029 or 2030. To do otherwise is to potentially break one of Labour's main manifesto pledges not to raise the 'big three' taxes.

"This so-called fiscal drag means pay rises (in response to inflation) will simply pull more workers into higher tax brackets. Analysts estimate that extending the freeze could raise about £10 billion a year by the end of the decade.

"The effect will be slow but certain for many workers who are earning towards the top end of the basic tax rate (up to £50,270). It is estimated that the tax bill for these workers will rise by £300–£400 annually by 2027, because any pay rises pushing them over £50,270 will be taxed at 40%."

What will this mean for workers in most tax bands?

Aaron Peake, Personal Finance Expert at free credit score service CredAbility , agrees: "Even if headline tax rates stay the same, many people could still feel worse off because tax bands and allowances remain frozen.

"As wages rise, more workers will quietly move into higher tax brackets without realising. This ‘fiscal drag’ means your take-home pay could shrink in real terms, even if your gross pay goes up. Before celebrating a pay rise, check how much extra will actually land in your account after tax and National Insurance.”

"It's kind of crazy how many people pay the higher rate [of income tax] now.”@HelenMiller_IFS and @DanNeidle discuss the prospect of continued fiscal drag and more higher-rate tax payers, from our live podcast on tax ahead of the Budget.

🎧 Listen here: https://t.co/0SWMcKdGMU pic.twitter.com/zIes5MXdTx

— Institute for Fiscal Studies (@TheIFS) November 14, 2025

Craig Rickman, Personal Finance Editor at interactive investor sums it up as "a tax rise that doesn't look like one".

He says: “Extending the threshold freeze is a tax rise that doesn't look like one - it's quiet, it's gradual, and it pulls more people into higher tax brackets every year as wages rise. It's lucrative for the Treasury but painful for anyone who suddenly finds themselves paying 40p, or perhaps even 60p, in the pound.

“You can't avoid frozen thresholds or potential changes to the headlines rates of income tax, but you can be smarter about managing what counts as taxable income. Maximise pension contributions to bring your taxable pay down and use ISAs to shelter investment returns from dividend tax and capital gains tax. These tax wrappers become more valuable, not less, when rates rise and thresholds freeze."

How about higher rate HMRC tax payers?

This hits even harder for those 698,000 are in the £100,000-£125,000 income bracket during the 2024/25 tax year – a 12 per cent increase on the previous year and a near-doubling over five years.

Taxpayers within the band face an effective marginal rate of 60 per cent due to the tapering away of the tax-free personal allowance. 

Scott Gallacher, Director at Leicester-based Rowley Turton , added: “The fact that nearly 700,000 people are now caught in the 60% tax trap shows just how punitive and unfair this quirk of the tax system has become. Sadly, this isn’t an accident — it’s the deliberate result of successive governments, Conservative and Labour, using the stealth tax of fiscal drag to pull more of our strivers into higher and higher taxes.

"The good news is that many can take steps to reduce the impact. Sensible tax planning, such as making pension contributions or using salary sacrifice, can often remove them from this band entirely, while at the same time giving a major boost to their retirement savings. But the key is to be proactive — leaving it too late can mean missing valuable opportunities to cut your tax bill.”

Why would the government freeze the personal allowance and what is 'fiscal drag'?

Ms Reeves is understood to have U-turned after improved forecasting from the Office for Budget Responsibility, but other tax rises have not been ruled out.

Limits to salary sacrifice schemes and new measures to tax electric vehicles are still in the mix, as the Treasury pursues a “smorgasbord” approach of raising a range of smaller taxes.

There are reports the Chancellor will extend the freeze on income tax thresholds for two years until 2030, in a move that could raise some £8 billion a year for the Treasury. This is known as 'fiscal drag'.

What about other taxes?

She could also introduce a new levy on some of the most valuable homes, which would mainly affect properties in London and the South East, according to The Telegraph.

The move would reportedly see 2.4 million of the most valuable properties across council tax bands F, G and H revalued and a new, separate, surcharge applied to 300,000 of them on top of existing council tax bills.

A Treasury spokesperson said: “We do not comment on speculation around changes to tax outside of fiscal events.”

Despite the U-turn on income tax, the Chancellor still intends to give herself larger fiscal headroom – the buffer against economic headwinds which could affect Government spending plans.

Ms Reeves has been laying the ground for tax rises over recent weeks, including during an early-morning speech on November 4 aimed at preparing people for the budget.

Downing Street said on Friday that the thrust of the speech still stands.

The Prime Minister’s official spokesman said: “She was very clear about the challenges the country faces and her priorities in addressing those challenges.

“All of that still stands.”

The spokesman refused to comment on budget speculation, but said the Chancellor will aim to “build more resilient public finances with the headroom to withstand global turbulence”.

Government borrowing costs rose on Friday as speculation about the change of direction sparked a sell-off in gilts, but the market later stabilised somewhat as the reasoning behind the Treasury’s decision-making became apparent.

Helen Miller, director of the Institute for Fiscal Studies (IFS) think tank, said it was “not unusual” for chancellors to make last-minute changes to their Budget plans.

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She added: “But the news that Rachel Reeves has backed away from a plan to increase the rates of income tax will lead investors to worry that the Chancellor will instead increase a range of smaller taxes that can be more damaging to economic growth.

“They may also worry that the change of plans signals that this Government are reluctant to do politically difficult things.

“These are the kinds of concerns that can lead investors to demand higher returns when lending to the Government.”

If the Government does choose to raise a set of smaller taxes, they should also be reformed “so that they do less damage to growth”, the IFS chief said.