Seven million individuals have been pulled into the income tax bracket due to frozen tax thresholds, as per recent analysis. The number of income taxpayers reached 40 million in the 2025/26 tax year, marking an increase of 1.3 million from the previous year and a total of 7 million since the freezing of tax thresholds in 2021/22.
The current personal allowance stands at £12,570, determining the threshold before income tax kicks in. Earnings exceeding this amount are subject to the basic 20% income tax rate. The higher 40% rate applies to earnings over £50,270, while the additional 45% rate is triggered once earnings surpass £125,140.
In a Budget announcement last November, Rachel Reeves confirmed the extension of the freeze on tax thresholds for an additional three years, now scheduled to remain unchanged until 2031.
The practice of freezing tax brackets, known as fiscal drag, results in more individuals entering higher tax brackets over time with wage increases. This method, described as a stealth tax, allows the government to collect more tax without officially raising tax rates.
The trend of increasing income taxpayers is expected to persist throughout the freeze period. Sarah Coles, AJ Bell’s head of personal finance, advises exploring strategies to minimize income tax payments, such as pension contributions for tax relief at the highest marginal rate and utilizing tax-efficient savings options like Cash ISAs and Stocks and Shares ISAs.
Furthermore, an additional 5,000 estates became liable for inheritance tax in the last tax year, bringing the total to 32,000 estates in 2025/26 – a rise of 5,000 since the rates were established in 2020/21. The number of estates subject to inheritance tax at death is projected to increase by 10,500 in 2027/28.
Ms. Coles emphasized that while inheritance tax mainly impacts those with substantial estates, the uptick in taxed estates highlights the importance of considering lifetime gifts to potentially reduce future tax liabilities.
