UK Households Face £500 Tax Allowance Blow as Freeze Continues
The Resolution Foundation thinktank has issued a stark warning that UK households are set to be approximately £500 worse off due to the ongoing freeze on personal tax allowances. This financial blow comes as the government extends tax threshold freezes until 2031, creating a perfect storm of economic pressure for families across the nation.
Tax Threshold Freeze Extended to 2031
In the Labour Party Autumn Budget, Chancellor Rachel Reeves confirmed the extension of tax threshold freezes through to 2031. For the 2026/27 tax year, the standard UK Personal Allowance remains firmly frozen at £12,570, meaning no income tax is paid on earnings up to this amount.
The basic rate of 20% continues to apply to income up to £50,270, with the higher rate of 40% applying up to £125,140, and the additional rate of 45% on income above £125,140. This freeze means that as wages increase with inflation, more people are pulled into higher tax brackets, effectively creating a stealth tax rise.
Energy Price Hikes Compound Financial Strain
The Resolution Foundation analysis reveals that energy price increases are set to compound the financial strain on households. The thinktank stated: "While there remains a high degree of uncertainty around the future path of energy bills, even a plausible best-case scenario – in which wholesale gas prices fall immediately to pre-war levels – would still mean around a £130 increase in the energy price cap in July."
"Alternatively, if the recent highs in gas prices become the norm for the remainder of the assessment period, the price cap could increase by close to £440, to around £2,100."
Poorest Families Hit Hardest
Lalitha Try, Economist at the Resolution Foundation, emphasized the disproportionate impact on vulnerable households: "The cost of living crisis never ended for millions of households – and now a new price shock is on the way, care of the conflict in the Middle East."
"Once again, it is the poorest families who will feel it most. They spend more of their income on essential costs like energy and food, meaning they experience a materially higher inflation rate than their better-off peers."
Try acknowledged the government's real-terms increase in Universal Credit this year as welcome but insufficient: "The Government’s real-terms increase in Universal Credit this year is welcome and will go some way to reversing its historic erosion. But with energy bills set to rise sharply ministers should be preparing a social tariff that gives low-income households protection against the next price shock – and the one after that."
Mounting Pressure on Household Finances
The combination of frozen tax allowances and rising energy costs creates significant pressure on household budgets. With inflation continuing to impact essential goods and services, families face a challenging financial landscape that requires careful navigation and potential government intervention to prevent further hardship.
