Freeze on Income Tax thresholds: what Budget 2025 means for your income

The continued freeze on Income Tax thresholds grabbed a lot of headlines after the 2025 Autumn Budget. It’s bad enough that the tax-free allowance for Income Tax will remain static for some years to come. But the frozen thresholds can also have a significant and cumulative effect on your income, whether from your salary, profits, rents or other sources.

To summarise the current situation:

• The main Income Tax thresholds are now frozen until April 2031
• From April 2027, there will be higher tax rates on property income – 22%, 42% and 47% instead of 20%, 40% and 45%

On their own, each change is simple enough. Put together, they mean many business owners, sole traders and landlords will be paying more tax on the same income over the rest of the decade.

Let’s break this down in plain English.

1. What’s been frozen

In England, Wales and Northern Ireland, the key UK Income Tax thresholds of 2025 will now stay the same up to 5th April 2031. They are as follows:

• Personal Allowance (the amount you can earn before you start paying Income Tax): £12,570
• Basic rate band: income taxed at 20% between £12,570 and £50,270
• Higher rate: 40% on income between £50,270 and £125,140
• Additional rate: 45% above £125,140

In the past, these thresholds usually crept up each year to help counteract the effects of inflation. Inflation has averaged 3% annually since 2021, making the freeze particularly challenging. But the current thresholds have been stuck in cash terms for most of the 2020s. The Personal Allowance threshold last changed in April 2021. The Higher and Additional rates were last adjusted in April 2023.

The same is true for many National Insurance thresholds, which have also been extended to 2031.

2. Why a freeze on Income Tax thresholds means higher tax over time

Economists call a freeze on Income Tax thresholds ‘fiscal drag’. The Office for Budget Responsibility (OBR) describes how freezing thresholds – instead of letting them rise with wages – pulls more people into tax and into higher bands over time.

A simple way to think about it:

1. IF your pay, business profits or rents go up each year, even just in line with inflation
2. BUT the points where 20%, 40% and 45% Income Tax kick in stay still
3. THEN more of your income ends up taxed, and more of it taxed at higher rates

So even if you never become richer in real terms, you can still find yourself drifting into higher tax bands just because of frozen Income Tax thresholds.

3. What’s changing for rental income from 2027?

From 6th April 2027, tax on most property income (including rental profits) will be charged at separate, higher rates. These are:

• 22% – property basic rate
• 42% – property higher rate
• 47% – property additional rate

That’s a flat 2% rise in each band compared with the Income Tax rates of 20%, 40% and 45%.

So if you have £6,000 of rental profit in a year (after your Personal Allowance has been used up):

• at 20% basic rate today, the tax is £1,200
• at 22% from April 2027, it would be £1,320 – an extra £120, before you even factor in any movement into higher bands

4. How your rental income will interact with your other income

If you have rental income the interplay with your Personal Allowance becomes important from April 2027. This is because the way your income is stacked up for tax purposes will change. From 2027, the order is:

1. Other income (for example, salary, pensions, self-employed profits)
2. Property income
3. Savings income
4. Dividends

Crucially, the rules say your Personal Allowance must be used against that ‘other’ income first (salary, trading profits etc.), before it can reduce any property income.

A simple example

Imagine in 2027/28 you have:

• £30,000 salary, and
• £6,000 rental profit from a buy-to-let property

What happens?

1. Your £12,570 Personal Allowance is used up by your salary. Your salary is the first layer.
2. The rest of your salary (£17,430) is taxed at 20% as basic rate income.
3. Your full £6,000 of rental profit then sits on top and is taxed at the new 22% property basic rate.

So the rental part alone would generate about £1,320 of tax (22% of £6,000), instead of £1,200 at today’s 20%.

If your salary rises over time but the frozen tax thresholds don’t, more of your total income will:

• move into the higher rate band, and
• pull part of your rental profit up into 42% property Income Tax, or even 47% for some.

You can see why many commentators have described the combination of frozen thresholds and the new rental income tax bands as a ‘slow squeeze’ on landlords.

5. Practical steps to consider

Everyone’s situation is different, but there are a few broad tax planning themes that are worth thinking about now.

Sense-check how close you are to the next band

If you’re a:

• sole trader
• director of your own limited company
• or a landlord with a day job

… take a look at your likely total income for the next few years, not just this year.

With frozen Income Tax thresholds until 2031, pay rises or profit growth that feel modest in real life can still push you into the higher rate bands.

For example, you could run a simple forecast (or ask your accountant to run one) showing:

• your expected salary or trading profits
• your expected rental profits
• which parts fall into 20%, 22%, 40%, 42% or 47% band from 2027 onwards

Pensions as a way to keep within a band

If you find that you’re in danger of going up an Income Tax band, there are strategies you can adopt. For many business owners and landlords, pension contributions are still one of the few levers that can:

• reduce your taxable income for Income Tax purposes, and
• keep more of your income in the basic rate band.

That might mean:

• a sole trader making extra personal contributions, or
• a company making employer pension contributions for a director instead of increasing salary or dividends by the same amount.

You need to stay within your pension allowances and think about cashflow, but it’s worth a conversation with your accountant.

Reviewing your property strategy

The rental income tax changes give landlords a clear timeline:

• Up to April 2027 – current 20% / 40% / 45% Income Tax rates
• From April 2027 – 22% / 42% / 47% property rates, on top of already frozen tax thresholds

In that window, it may be sensible to:

• check whether your current ownership structure (individual, joint, etc.) still makes sense
• consider whether income could be shared more evenly between spouses or civil partners, where appropriate and after advice
• revisit your longer-term plans for holding or selling particular properties

None of these should be rushed – there can be Capital Gains Tax, mortgage and legal implications – but doing nothing now means simply accepting higher effective tax rates later.

How THP can help you counteract the freeze on Income Tax thresholds

The combination of a long freeze on Income Tax thresholds and higher Income Tax and rental income tax rates is, in many ways, a classic stealth tax. Headline rates may look familiar, but over time more of your income ends up in HMRC’s coffers.

If you’re a small business owner, sole trader or landlord and you’d like to:

• understand how these changes affect your own salary, drawings and rental profits
• see how close you are to tipping into the next tax band
• explore sensible pension or ownership options
• build a simple, realistic plan for the years up to 2031

…our team at THP Chartered Accountants would be happy to help.

Get in touch with your THP account manager or – if you’re a new client – get in touch today. We’ll walk you through the and help you avoid nasty surprises from frozen thresholds and the new property rental tax rules.