Income tax thresholds will remain frozen until 2031, adding to the growing tax burden on millions of workers and pensioners.

John Healey pledged to provide 'breathing' space in his first Budget, with help offered for low-income families – but it's the middle-classes and workers who will foot the bill.

The continued freeze on the thresholds, introduced by Rishi Sunak in 2021 and extended by Rachel Reeves in 2025, will stage a colossal tax raid through a phenomenon known as fiscal drag.

As wage growth and inflation rise in the years to 2031, frozen thresholds will drag more lower earners into paying tax while the number of taxpayers pushed into higher bands increases.

That will help to raise more revenue for the Treasury, with recent estimates suggesting it could bring in as much as £55billion a year by 2030.

You can see the effect of fiscal drag on your salary using our calculator below. 

Put in your current salary and the calculator and the calculator will adjust it back using inflation. Or you can use your actual salary from each year and it will tell you how much extra tax you’ve paid. 

Where should tax thresholds be?

The issue of frozen tax thresholds has not gone unnoticed by the Prime Minister who, over the summer, said it had come up frequently on the doorsteps during his by-election campaign.

But his Chancellor has chosen to keep with the freeze to boost the Treasury's coffers after keeping sweeping tax changes to a minimum.

If the personal allowance had increased in line with CPI since 2021, it would have risen from £12,570 to £16,080. 

By 2030/31 it would have reached £17,960, based on inflation estimates. 

For example, if you currently earn £25,000, you'll pay £700 more in income tax this tax year and £5,900 more by 2030, if your salary kept up with inflation. 

If the 40p tax higher rate threshold had increased with inflation, it would be £64,480, up from the current £50,270, and £72,160 by 2030. 

Someone currently on the cusp of the higher rate tax band and earning £50,000, would pay £8,100 more by 2030 as they are dragged into a higher threshold. 

A worse hand has been dealt to those even further up the income scale, as the threshold for the 45p additional rate of income tax was cut by Jeremy Hunt from £150,000 to £125,140 from April 2023.

If the additional rate threshold had increased with CPI, it would be £132,160 today and £135,920 by 2030-31. 

This fiscal drag compounded over the years has pulled millions more taxpayers into the higher and additional rate bands, leaving them paying thousands more a year.

How do frozen thresholds affect your finances?

Frozen tax thresholds have led to more people being dragged into paying income tax.

A frozen personal allowance has also shunted more people into higher income tax brackets as their pay increases over time.

People getting the state pension are also affected. As the state pension increases, more older people have to pay tax on it as the personal allowance remains frozen.

From next year, the full state pension will nudge beyond £13,000.

The decision by successive former chancellors to leave income tax bands unchanged, even as wages and the cost of living increase, has helped boost Treasury coffers.

Recent estimates by the Office for Budget Responsibility suggest frozen tax thresholds could bring in more than £55billion a year extra by 2030, and with it higher taxes for ordinary workers.

Jenny Holt, director at Standard Life said: ‘The decision to leave the Personal Allowance unchanged is not a major surprise, given the pressure on the public finances, but it will still be disappointing for households already feeling the effect of frozen tax thresholds.' 

She added: 'For workers, this means pay increases may not translate fully into higher take-home income, making it harder to balance day-to-day costs with longer-term saving.' 

> Chancellor to ditch Rachel Reeves' cash Isa raid and keep limit at £20,000 

What will happen to pensioners?

John Healey plans to raise the poorest pensioners' income tax threshold to £13,036, matching the full new state pension rate from next April.

Those relying on just the state pension had been set to pay income tax on it for the first time from next April, as the annual amount would breach the income tax threshold of £12,570.

But there are concerns this might only apply to under-75s on the new state pension, and could exclude older pensioners who are on the old, pre-2016 system.

The scheme, which would cost £200million a year by 2030 according to a report in The Times, could therefore create a 'two-tier' system, a former pensions minister has said.

'[S2P and Serps] have never been protected by the triple lock and it is not clear that they will be given the same tax exemption as the younger pensioners on similar incomes,' said Baroness Ros Altmann.

> Why the oldest pensioners will miss out on £770 Budget tax relief under 'two tier' system