The Budget's stealth tax phenomenon and how much it will cost you

"After Wednesday's Budget, the chancellor Rachel Reeves is keen to point out that she hasn't raised taxes for working people, but if you look at the figures, we're all gradually paying more tax due to the government's clever use of fiscal drag. It all began back in 2021 when the Conservative Party froze the thresholds at which you start paying basic-rate and higher-rate income tax."

"In doing so, the Treasury found a way to increase its revenue, as higher wages and inflation bring more taxpayers over those thresholds. Up until this week, the thresholds were set to be frozen until 2028. The Budget saw that timeframe extended to 2031. It's quite the U-turn for Reeves, who in opposition claimed that the policy was picking the pocket' of working people, says Laura Suter, director of personal finance at AJ Bell."

"But when you start taking a closer look at the figures, it is an obvious way for Reeves to dramatically increase tax revenue while also being able to argue that she hasn't raised tax rates. Vote in our Independent Money poll: Which Budget announcement are you most disappointed in? According to the Office for Budget Responsibility (OBR), by extending the freeze, the Treasury should gain 12bn by 2031. It also estimates that the freeze will cost each of us around 1,330 a year by 2029."

Fiscal drag occurs when income-tax thresholds are frozen, causing wage inflation to push workers into higher tax brackets. Thresholds including the personal allowance have been frozen since 2021 and were initially set to remain unchanged until 2028; the Budget extended that freeze to 2031. Freezing thresholds increases Treasury revenue without changing headline tax rates because more taxpayers cross into basic- and higher-rate bands. The Office for Budget Responsibility estimates the extension will raise £12bn by 2031 and increase average individual tax bills by about £1,330 annually by 2029. The cumulative effect produces substantially higher tax bills compared with inflation-indexed thresholds.

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