While the Chancellor avoided personal tax increases in his Budget, he managed to raise around £8 billion a year through a rather sneaky mechanism of freezing thresholds and allowances.

This stealth tax means that more people will pay more in taxes over the next five years, as more of their income, capital gains and pensions fall into higher rates of tax.

An estimated 1.3 million people will pay income tax for the first time, due to the stealth tax increases.

On income tax, the tax-free personal allowance is going up on 6th April 2021, from its current level of £12,500 to a new personal allowance of £12,570.

The personal allowance is then frozen for five years, until 6th April 2026. The frozen personal allowance applies in England, Wales and Northern Ireland, but not Scotland, where there are different income tax thresholds for employees.

Also going up on the 6th of April is the threshold for higher rate income tax, rising from £50,000 to £50,270. Much like the personal allowance, the threshold is then frozen for five years, staying at this level until 6th April 2026.

There is also a freeze to the additional-rate threshold for income tax, above which income tax is charged at 45%. Unlike the other thresholds, this level is not going up at all on 6th April, and will stay frozen at £150,000.

With frozen thresholds and earnings inflation, more people will pay more tax as a result of these measures. In financial jargon, this process is known as ‘fiscal drag’ and it will create more higher-rate taxpayers; an estimated 1 million more people will pay higher rate tax by the 2025/26 tax year.

Another freeze applied in the Budget is for class 1 National Insurance contribution thresholds, paid by employees.

The lower threshold, below which you don’t pay any National Insurance contributions, goes up from £9,500 to £9,568 on 6th April, with its future being decided at a future ‘fiscal event’ i.e. another Budget or Spring/Autumn Statement.

For the upper earnings limit, this will be frozen until April 2026 at its new level of £50,270 (up from £50,000).

Employees paid 12% National Insurance contributions on their earnings below the upper threshold, and 2% on earnings above the threshold, but it’s hard to know what impact this frozen threshold will have on overall taxes until we know the fate of the lower threshold.

Away from our incomes, the thresholds for the capital gains tax annual allowance, inheritance tax nil rate band and pensions lifetime allowance are also being frozen for five years.

The capital gains tax annual allowance stays at £12,300 a year for individuals. This is the tax-free amount for realised capital gains each year.

On inheritance tax, the nil-rate band stays at £325,000 and the additional property nil-rate band (only applicable for direct descendants) stays at £175,000, both through until April 2026.

The pension lifetime allowance is being frozen at £1,073,100 until April 2026, with pension pots or benefits exceeding this amount subject to a lifetime allowance tax charge.

Clare Moffat, head of intermediary development & technical at Royal London, said:

“Given the economic backdrop, anything that raises tax income is understandable. However, it’s becoming painfully difficult for people approaching retirement to plan with any certainty when the rules are constantly changing around how much they can save during their lifetime.

“Building a pension pot for retirement is a long term objective and needs some stability in the tax rules to allow people to plan effectively.

“The lifetime allowance usually rises in line with CPI every year and a five year freeze means the lifetime allowance will be substantially lower by 2025/26 than it otherwise might have been. We will see more people potentially falling foul of a tax charge.”