UK Tax-Free Allowance Freeze May Push 7 Million into Higher Tax Rates! Labour's Welfare Reform U-Turn Sparks Controversy
- TBA
- Jul 7
- 5 min read
HMRC's urgent warning to seven million UK households over tax rates
According to the latest data from HM Revenue & Customs (HMRC), more than 7 million households across the UK will soon receive letters from the tax authority warning them that they are about to be affected by the “frozen income tax threshold” policy. This policy will push more earners into higher tax brackets, increasing their tax burden.
Data shows that by the 2025/26 fiscal year, an additional 500,000 people will be subject to the 40% higher-rate tax, bringing the total number of people paying this rate above 7 million for the first time. Back in the 2021/22 fiscal year, the number was only 4.4 million.
Laura Suter, Head of Personal Finance at UK investment services provider AJ Bell, said: “The frozen tax thresholds affect everyone, including retirees and anyone earning above the £12,570 tax-free allowance. But the people who will really feel the pinch are those who find themselves unexpectedly pushed into the higher tax bracket due to pay rises.”She further explained: “Once your income exceeds £50,270, every extra pound earned is taxed at 40% instead of the basic 20%. This means that even if you get a raise, it may not make a noticeable difference to your take-home pay.” Additionally, nearly one-fifth of all UK taxpayers now fall into the 40% tax bracket. This rate, once reserved for high earners, is becoming increasingly common.
In response, a UK government spokesperson stated: “We inherited the policy of freezing income tax thresholds from the previous Conservative government. However, Chancellor Rachel Reeves has made it clear in her latest budget and spring statement that she will not extend the freeze.” The government has also pledged to uphold its commitment not to raise the basic, higher, or additional income tax rates, nor increase employee National Insurance or VAT, in order to protect workers’ take-home pay.
In fact, the freeze on personal tax allowances was first introduced during the COVID-19 pandemic by then-Chancellor Rishi Sunak and later extended to 2028 by his successor Jeremy Hunt.
For the 2025/26 fiscal year, income tax thresholds in England, Wales, and Northern Ireland are as follows:
● Personal allowance: £12,570 — No income tax is due on earnings up to this amount.
● Basic rate (20%) — Applies to income up to £37,701.
● Higher rate (40%) — Applies to income between £37,701 and £125,140.
● Additional rate (45%) — Applies to income above £125,140.
If your annual income exceeds £100,000, your personal allowance starts to taper:
● For every £2 earned over £100,000, £1 of the personal allowance is lost.
● Once income reaches £125,140 or more, the personal allowance is reduced to zero.
This means individuals at this level pay tax on all their income with no tax-free allowance.
U-turn in UK Welfare Reform: Planned Fiscal Savings May Evaporate
Last week, Chancellor Rachel Reeves was seen in tears in the House of Commons, sparking public speculation that the Labour government is descending into turmoil following a chaotic vote on welfare reform. Many believe Reeves could be “sacked” for failing to uphold fiscal balance.
Recently, Prime Minister Keir Starmer announced plans for major concessions on the welfare reform bill, proposing a series of changes to the Personal Independence Payment (PIP) system.
However, under pressure from over 120 Labour MPs who opposed the move, the government scrapped the reform just 90 minutes before the scheduled Commons vote. They also announced a delay in implementing new assessment standards for new applicants, pending a broader review. This decision means that the anticipated fiscal savings from the reform will be significantly reduced — or possibly vanish altogether.
PIP is a key UK benefit for people with long-term physical or mental health conditions. Currently, 3.7 million people receive it. It is composed of two parts:
● Daily Living Component:
○ Standard rate: £73.90 per week
○ Enhanced rate: £110.40 per week
● Mobility Component (not part of the current reform):
○ Standard rate: £29.20 per week
○ Enhanced rate: £77.05 per week
In March this year, the government proposed tightening the daily living assessment criteria for new PIP applicants, aiming to save around £5.5 billion annually by 2030. With the plan now stalled, Labour may achieve zero net savings between now and the 2029/30 fiscal year.
Another major benefit under review is Universal Credit (UC). Its basic monthly amount is:
● £400.14 for single claimants over 25.
Those deemed unable to work due to health conditions can receive an additional £423.27 per month. The government had planned to reduce this supplement through several measures:
● Limiting eligibility to those aged 22 and over
● Cutting new claimants’ supplement from £97 to £50 per week, and freezing it until 2029/30
● Initially planning to freeze the existing higher-rate supplement, but now deciding to increase it in line with inflation
By 2029/30, the basic amount of Universal Credit will rise to £106 per week.
With these reforms now watered down, Chancellor Reeves’ hopes of funding spending without large tax increases are fading. The Labour Party’s struggles are widely interpreted as a sign that the UK is on a path toward higher taxation.
The EU is considering imposing high tariffs on Chinese electric vehicles
According to the latest industry data, one in every ten cars sold in the UK in June this year was made in China. Emerging Chinese brands such as BYD, Jaecoo, and Chery Omoda have been expanding rapidly in the UK market.
In recent months, Chinese car brands have seen a particularly sharp rise in sales — even as most G7 countries have imposed steep additional tariffs on Chinese imports.
Data from the Society of Motor Manufacturers and Traders (SMMT) shows that in June, around 18,944 vehicles from Chinese-owned brands — including MG (Morris Garages) under SAIC Group and Polestar — were sold in the UK, making up 10% of total car sales, up from 6% in the same month last year.
In contrast, as of May this year, Chinese automakers held only a 4.3% market share in the EU, 1.6% in Germany, 2.7% in France, and 9.2% in Spain.
Analysts commented: “The UK has not yet imposed tariffs, and the growing popularity of EVs presents a huge opportunity for Chinese manufacturers. Moreover, unlike France and Germany, the UK does not have a large domestic auto industry to protect.”
Currently, most EU member states support imposing high tariffs on electric vehicles imported from China, with rates potentially reaching up to 45%. Canada has also announced steep tariffs, set to impose a 100% duty on Chinese-made electric vehicles.
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