MILLIONS of workers are set to get a pay rise after the Chancellor today announced that a freeze on income tax thresholds will end.
Rachel Reeves had been widely expected to extend the freeze, which has been in place since 2021.
But in a surprise move, the thresholds will increase again after 2028, giving a boost to incomes.
You currently pay no income tax on the first £12,570, known as the personal allowance.
You then pay tax at 20% on income over this and up to £50,271.
Then, on earnings over that and up to £150,000, pay 40%.
These thresholds usually rise each year in line with inflation but were frozen under the previous Conservative government until 2028.
A freeze on income tax is known as a stealth tax.
While rates don't increase, more people are drawn into paying tax or higher rates as wages increase.
However, Chancellor Rachel Reeves said today: "The previous government froze income tax and National Insurance thresholds in 2021 and then they did so again after the mini-budget.
"Extending their threshold freeze for a further two years raises billions of pounds.
"Money to deal with the black hole in our public finances… … and repair our public services.
"Having considered the issue closely I have concluded that extending the threshold freeze would hurt working people.
"So there will be no extension of the freeze in income tax and National Insurance thresholds beyond the decisions of the previous government.
"From 2028-29, personal tax thresholds will be uprated in line with inflation once again."
What is the personal allowance?
THE personal allowance is the amount you can earn each year tax-free.
In the current tax year - which runs from April 6 2024 to April 5 2025 - the figure is £12,570.
Any earnings above this threshold are taxed at different rates, depending on the income bracket.
However, this amount may be larger if you claim certain allowances, including a blind person's allowance, marriage allowance and child tax credit.
Income tax also applies to money you make outside your job, not just your earnings.
But there are also some tax-free allowances on top of the personal allowance for these other sources of income.
If you are self-employed, you don't have to pay tax on savings interest, dividends and the first £1,000 of income.
INCOME TAX RATES
You currently pay no income tax if you earn £12,570 or less.
On earnings between £12,570 and up to £50,270, you pay the basic income tax rate of 20%.
Wages of £50,271 and above are taxed at the higher rate of 40%.
The additional income tax rate, which applies to earnings above £150,000, is 45%.
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The income tax thresholds generally rise yearly so that people can earn more without paying more tax.
These thresholds will rise again in now frozen until 2030.