HMRC did not increase the tax-free Personal Allowance (Image: Getty)
A ‘stealth tax’ rise cost UK households £95 each this April after the tax-free Personal Allowance was frozen for the new tax year.
The tax-free Personal Allowance has been set at £12,570 again for April 2026 to April 2027, having been frozen for another five years until 2031 at the earliest. It will mean that by 2031 the allowance will have been stuck at the same level for 10 years in a row.
The threshold dictates the amount that individuals can earn before they start owing Income Tax, with nothing to pay on the first £12,570 and then 20% on everything above that, 40% on everything above £50,270 and 45% on everything above £125,140.
This year, inflation was set at 3.8%, which was the figure used as part of the Triple Lock calculations for pensions. In the end, the state pension increased by 4.8% because wage growth was higher than inflation.
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If the tax-free Personal Allowance had been increased for inflation, it would have gone up by £477.66. It means that workers could have saved £95.40 off their tax bills had the threshold increased for inflation.
A Research Briefing from the UK Parliament House of Commons library called Fiscal Drag: An Explainer sets out the impact of tax thresholds being frozen.
It says: “Not increasing the value of tax thresholds (‘freezing’ them) increases people’s taxable income without tax rates actually increasing. This results in additional revenue to the government. This phenomenon is called ‘fiscal drag’, as more taxpayers are ‘dragged’ into paying tax, or into paying tax at a higher rate.
“Although fiscal drag is not uncommon, its impact depends on three elements: the setting of thresholds and allowances (also known as just ‘thresholds’), growth in prices (inflation), and growth in earnings. How thresholds are set is an important determinant of the magnitude of fiscal drag, especially if inflation is high.
“Under legislation enacted by the previous government between 2021 and 2023, a number of tax thresholds (such as income tax ones) are frozen in their cash value for the period between April 2022 and April 2028. The Labour government further extended this freeze to April 2031 at Autumn Budget 2025. Provision for this is included in the Finance Act 2026.
“Since freezing thresholds raises overall tax revenue without tax rates actually increasing, the policy has also been branded as a stealth tax.”
It continued: “However, other commentators have argued there is a case for this type of tax measure. An editorial in the Financial Times in March 2022 said that they did not oppose ‘stealth taxes’ in principle, arguing that the thresholds freeze in a high-inflation environment would help raise revenue to cover the cost of Covid-19 schemes. However, they also added that, in a high-inflation environment, the reduction in the real value of people’s incomes would be felt.”
This week, Express reader Mike Haynes launched a petition to raise the tax-free Personal Allowance to £18,000.
An HM Treasury spokesperson said: “In the Budget we increased the National Living Wage and National Minimum Wage and took £150 off people’s energy bills, extended the freeze on prescription fees, fuel duty and froze rail fares for the first time in 30 years.
“The fair and necessary decisions we made at the Budget mean we can deliver on the country’s priorities – cut waiting lists, cut debt and borrowing and cut the cost of living.”
