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Budget 2025: Tax hikes to be dropped in favour of threshold freezes plans - what this means for your money

Rachel Reeves is set to drop tax hikes in favour of threshold freezes - but experts say this could lead to millions facing higher bills as frozen tax bands quietly push more income into taxation šŸ’ø

By Fionnuala Bourke
Published

  • The Government is expected to extend the freeze on income tax thresholds until 2030

  • The move means millions will pay more tax over time, even without a rise in income tax rates

  • Rachel Reeves has reportedly dropped a planned income tax increase after improved forecasts

  • Additional measures, including a levy on high-value homes and changes to salary sacrifice schemes, are still being considered

  • Overall tax burdens are likely to increase as more workers are pulled into higher bands through ā€˜fiscal dragā€™

Tax bills could rise for millions of workers over the coming years, despite reports that the Government will not proceed with an increase to income tax rates in the 2025 Budget, finance experts are warning.

This is because Chancellor Rachel Reeves is expected to extend the freeze on income tax thresholds until 2030.

This measure increases the amount of tax people pay as wages rise, even though the rates themselves remain the same.

Rachel Reeves
Chancellor Rachel Reeves will deliver the Budget later this month (Justin Tallis/PA)

The threshold freeze has been in place for several years and is often described by economists as a ā€œfiscal dragā€ mechanism.

Because the tax bands do not rise with inflation, more workers gradually move into higher tax brackets, and a greater proportion of their income becomes taxable.

If extended for two more years, the measure is reported to raise around Ā£8 billion per year.

For households facing higher living costs, this means the effective tax burden could continue to increase throughout the decade, reducing the impact of pay rises and limiting take-home income.

A reversal on income tax?

Reports suggest the Chancellor has decided against raising income tax rates after updated economic forecasts from the Office for Budget Responsibility indicated a smaller-than-expected gap in public finances.

Increasing income tax would have contradicted a Labour manifesto commitment, and the latest projections appear to have allowed the Treasury to change course.

But this does not mean the overall tax burden will fall. Freezing thresholds typically raises significant revenue, and the Government is also understood to be considering a number of smaller tax changes to support its spending plans.

Will the average person still pay more?

In most cases, yes. Even without a rate rise, a threshold freeze means many workers will pay more tax over time as earnings increase.

Someone receiving regular inflation-linked pay rises could move into a higher bracket or have more of their salary taxed at a higher rate, even if their standard of living has not changed.

What other measures are being considered?

Several additional tax options reportedly remain on the table:

  • A new levy on higher-value homes, following a revaluation of properties in council tax bands F, G and H. Around 300,000 properties, mostly in London and the South East, could see an extra surcharge added to existing council tax bills.

  • Changes to salary sacrifice schemes, which could affect people using arrangements such as cycle-to-work, childcare schemes, or electric vehicle leasing.

  • An adjustment to how electric vehicles are taxed, though details have not yet been confirmed.

  • A broader mix of potential smaller tax changes across different sectors.

The Treasury has not commented on these reports, saying it does not discuss tax decisions ahead of fiscal events.

Why the shift in approach?

The Government has emphasised the need to increase ā€œfiscal headroomā€, a buffer to ensure public finances can better withstand economic uncertainty.

Officials have indicated this remains a priority, even with adjustments to the specific measures being considered.

Some economists note that changing course close to a Budget announcement is not unusual, but warn that relying on numerous smaller tax increases may raise questions about the long-term clarity of tax policy.

What this means for households

  • For most people, the main impact will come from the continued freeze to the tax thresholds. This means:

  • Take-home pay will rise more slowly than gross pay.

  • More people will be pulled into higher tax bands over time.

  • The overall tax burden is still likely to increase, even without headline rate rises.

What do you think of the plans for the Budget 2025? Tell us your thoughts in the comments section below šŸ‘‡