Personal tax allowance update as six million people hit in 'quiet' tax grab

Millions more workers and pensioners are being quietly pulled into the tax net as frozen personal allowances deliver a stealth tax bonus for the Treasury, new figures reveal.

The number of income tax payers has surged to 37.7 million in the 2024/25 tax year – up 6.2 million compared to just five years ago.

The figure is also 1.4 million higher than the year before, as the tax burden intensifies on households already grappling with the cost-of-living crisis.

At the same time, the number of people paying Class 1 National Insurance – the payroll tax on earnings – has also risen sharply, from 26.6 million in 2022/23 to 28.5 million in the current tax year.

The decision by the former Conservative government's decision to freeze income tax thresholds, including the £12,570 personal allowance, means it has not budged since 2021/22 despite soaring inflation. The resulting so-called fiscal drag means wages and pensions rise with inflation, but the point at which people start paying tax remains the same – dragging more people into the system and forcing others into higher tax bands.

Clare Stinton, head of workplace saving analysis at Hargreaves Lansdown, warned: “Frozen income tax thresholds are quietly reshaping the tax landscape, with millions more people now paying tax.

"New figures reveal that there were six million more income taxpayers than there were five years ago, with 37.7 million of us paying tax in 2024/25.

"This is fiscal drag in action - a stealth tax that quietly increases the tax burden across the board."

She added: "Since 2021/22, the personal allowance has been stuck at £12,570. If it had kept pace with inflation, it would be around £15,518 today.

"Instead, millions on modest incomes have been dragged into paying tax for the first time.

"The cost-of-living crisis hasn’t gone away, and now lower earners must factor tax into their long list of essentials. With the freeze set to remain until 2028, the impact is only set to deepen.”

The elderly are among the most vulnerable to the creeping tax grab. The State Pension has risen by 24% in three years, due to the triple lock – from £185.15 in 2022/23 to £230.35 per week in 2025/26 – but many pensioners now risk being taxed on this income alone.

Ms Stinton added: “Pensioners are particularly at risk... if the State Pension continues to rise at a similar pace, more retirees could soon find themselves crossing the personal allowance threshold and paying tax on their State Pension alone."

The effect is not limited to the poorest. Those with modest savings and investments are also caught, as inflation-linked pay rises nudge them into higher brackets. This means more income is taxed, more savings are taxed, and more people pay more, without any official tax hikes.

“That’s why it’s more important than ever to be proactive with your tax planning,” said Ms Stinton.

“Paying into your pension can help keep total taxable income below income tax thresholds, while at the same time boosting your retirement savings. A double win.

"And for those saving for retirement, it’s worth thinking long-term. If you’re aiming for a retirement income that may exceed future tax thresholds, consider using ISAs alongside a pension. Income taken from an ISA is tax free so can be used alongside a pension to give you much needed flexibility in managing your tax bill.”

The figures, published by HMRC, have fuelled fresh accusations that ministers are relying on stealth taxes to shore up the public finances, rather than openly raising tax rates. Critics argue the approach disproportionately hurts workers and savers, particularly as the freeze is due to remain until 2028.

James Murray, Exchequer Secretary to the Treasury told a debate of MPs in May that the estimated cost of raising the threshold to £20,000 was very high - a figure being demanded in a popular petition. He said: “I recognise the views of everyone who has put their name to the petition, and let me be clear that, as a Government, we want taxes on working people and on pensioners, who have worked hard all their lives, to be as low as possible.

“We were elected to put more money in people’s pockets and, crucially, we were elected to do so in a fiscally responsible way. That is a critical point to understand. We want to keep taxes on working people and pensioners as low as possible, but if we were to follow the calls of some Opposition parties and abandon fiscal responsibility, it would lead to economic chaos and the collapse of public services, and that would harm working people and pensioners the most."