Budget 2025: What the Income Tax & NI Threshold Freeze Means for You

Chancellor Rachel Reeves announced in the November 2025 UK Budget that Income Tax and National Insurance thresholds will remain frozen for an additional three years, extending the freeze until April 2031. This decision will significantly impact take-home pay for millions of workers across the UK through a phenomenon known as "fiscal drag."

What Has Changed?

The Budget 2025 UK confirmed that key tax thresholds will remain at their current levels until April 2031:

• Personal Allowance: Frozen at £12,570
• Higher Rate Threshold: Frozen at £50,270
• Additional Rate Threshold: Frozen at £125,140
• National Insurance Primary Threshold: Frozen at £12,570
• National Insurance Upper Earnings Limit: Frozen at £50,270

These thresholds were originally frozen from 2021 to 2028. The HMRC updates 2025 extend this freeze for a further three years, meaning no adjustment for inflation until 2031.

Understanding Fiscal Drag

Fiscal drag occurs when wages rise with inflation but income tax thresholds UK remain static. As earnings increase, more income is taxed at higher rates, even though purchasing power hasn't improved. This effectively increases the tax burden without changing tax rates—a "stealth tax" that will affect millions of taxpayers over the coming years.

Who Is Affected?

The threshold freeze impacts various groups differently:

Employees

• Workers receiving annual pay rises will see more income taxed at higher rates
• First-time taxpayers: Those earning below £12,570 who receive pay increases may begin paying tax for the first time
• Reduced take-home pay despite nominal wage growth

Higher-Rate Taxpayers

• Anyone earning above £50,270 already pays 40% tax on income above this threshold
• Pay rises will push more earners into the 40% bracket
• Those near the £100,000 mark face loss of Personal Allowance (at £1 for every £2 earned above £100,000)
• Effective tax rate can reach 60% between £100,000 and £125,140

Company Directors

• Directors using salary/dividend strategies face higher tax on dividends due to frozen thresholds
• National Insurance considerations remain crucial for optimal remuneration planning
• Need to review compensation structures in light of extended freeze

Pensioners

• State Pension increases (4.8% in April 2026 under Triple Lock) will push more pensioners over the Personal Allowance
• Many pensioners will become taxpayers for the first time
• Those with additional pension income face higher tax bills as State Pension rises

Small Businesses

• Payroll costs affected as employees expect higher gross pay to maintain living standards
• Employer National Insurance Secondary Threshold also frozen at £5,000 until 2031
• Need to factor in employee expectations during salary reviews

What It Means for Taxpayers

The UK tax changes 2025 will reduce real-terms take-home pay for most workers. Here are worked examples:

Example 1: Basic Rate Taxpayer

Current salary: £30,000
After 3% annual pay rise (2026): £30,900

Tax Year	Gross Income	Income Tax	National Insurance	Take-Home (approx)
2025-26	£30,000	£3,486	£1,746	£24,768
2026-27	£30,900	£3,666	£1,854	£25,380

Result: Despite a £900 pay rise, take-home increases by only £612—a real-terms loss after inflation.

Example 2: Moving into Higher Rate Tax

Current salary: £48,000
After two 3% pay rises: £50,923 (2027)

This individual crosses the £50,270 threshold, meaning earnings above this are taxed at 40% instead of 20%. The marginal impact is significant: every £1 earned above £50,270 is taxed at 40%, plus 2% National Insurance.

Example 3: Pensioner on State Pension

State Pension April 2026: £11,975 (new State Pension)
After 4.8% increase: £12,550

This pensioner remains just below the Personal Allowance. However, with further Triple Lock increases projected at 3-4% annually, they'll likely exceed £12,570 by 2027-28, becoming a taxpayer for the first time on State Pension alone.

Tax Planning 2025: Practical Planning Opportunities

With thresholds frozen until 2031, proactive tax planning 2025 is essential:

For Employees

• Pension contributions: Maximise contributions to reduce taxable income, especially if nearing higher-rate threshold
• Salary sacrifice schemes: Use employer schemes for childcare vouchers, cycle-to-work, or pension contributions
• Gift Aid donations: Extend basic rate band by amount of grossed-up donations
• Marriage Allowance: Transfer £1,260 of Personal Allowance to spouse if they're a non-taxpayer

For Higher Earners (£100,000+)

• Pension contributions: Critical for recovering lost Personal Allowance—contributing £40,000 reduces taxable income and effective tax rate
• Timing of bonuses: Consider splitting across tax years if possible
• Childcare costs: Use Tax-Free Childcare scheme or workplace nursery benefits

For Company Directors

• Review salary/dividend mix: Optimal strategy may shift as thresholds remain frozen
• Consider pension contributions: Employer contributions avoid both Income Tax and National Insurance
• Use of spouse's allowances: If spouse has unused Personal Allowance or lower rate band

For Pensioners

• Defer State Pension: If still working, consider deferring to avoid higher tax
• Use Personal Savings Allowance: £1,000 tax-free savings interest for basic rate taxpayers
• Pension withdrawal planning: Spread withdrawals to stay within lower tax bands

For Business Owners

• Employee retention: Consider non-salary benefits to help employees maintain living standards
• Salary review strategy: Factor in higher tax burden when planning pay rises
• Review pension auto-enrolment: Enhanced pension contributions may become more valuable to employees

Summary: Income Tax & NI Threshold Comparison

Threshold	2021-2028 (Original Freeze)	2028-2031 (Extended Freeze)	Impact
Personal Allowance	£12,570	£12,570	No inflation adjustment for 10 years
Higher Rate (40%)	£50,270	£50,270	More earners paying 40% tax
Additional Rate (45%)	£125,140	£125,140	Top earners face continued freeze
NI Primary Threshold	£12,570	£12,570	More workers paying NI as wages rise
NI Upper Earnings Limit	£50,270	£50,270	12% NI up to this limit, 2% above

Key Takeaways

• The threshold freeze extends to April 2031, meaning no adjustment for inflation across an entire decade
• An estimated three-quarters of the revenue from this measure will come from the top 50% of households by 2029-30
• Fiscal drag will pull more workers into higher tax brackets despite no real increase in purchasing power
• Proactive tax planning can help mitigate the impact through pensions, salary sacrifice, and strategic income management
• Small businesses should prepare for employee expectations around pay rises that offset higher tax burdens

Need Expert Guidance?

The Budget 2025 UK threshold freeze will affect your finances for years to come. Whether you're an employee concerned about take-home pay, a higher earner facing marginal rates above 60%, or a business owner managing payroll costs, professional advice is crucial.

Want tailored advice on how Budget 2025 affects you? Contact MA & Co Accountants for a personalised tax planning review.

Our team of chartered accountants can help you:

• Model the impact of threshold freezes on your specific circumstances
• Identify tax-efficient strategies to minimise your liability
• Plan salary, dividends, and pension contributions optimally
• Navigate complex scenarios like Personal Allowance tapering
• Ensure compliance with the latest HMRC regulations

Book your consultation today. Let's make sure you're prepared for the tax landscape ahead.