Millions of UK households are facing a potential annual financial hit of over £500 by the end of the decade due to a planned freeze on tax thresholds. This analysis, based on recent expert commentary, suggests that this fiscal policy, extended by the current government, could significantly impact the real post-tax income of many workers. The issue stems from the decision to maintain current tax thresholds, meaning that as wages and inflation rise, more people will be pulled into higher tax brackets without their allowances increasing proportionally. This phenomenon, often referred to as fiscal drag, quietly increases the tax burden on individuals over time.
This tax freeze was initially introduced by the Conservatives in the 2021-22 tax year and was subsequently extended through to 2028. However, recent announcements indicate a further extension of this freeze until 2031, amplifying its long-term effects. While those solely reliant on the state pension are expected to remain exempt from income tax, the broader working population is likely to feel the pinch. The Centre for Policy Studies, a prominent think tank, has conducted analysis suggesting that workers earning around £50,000 could see their real, post-tax income decrease over the next five years, even with anticipated pay rises and inflation adjustments.
What is fiscal drag and how does it affect workers? Fiscal drag is an economic phenomenon where inflation and wage growth push taxpayers into higher tax brackets without any change in tax rates. This results in a higher effective tax rate and a reduction in real disposable income, even if nominal wages are increasing. For many, this stealth tax increase can lead to a noticeable decrease in their take-home pay over time.
According to the Centre for Policy Studies’ projections, a worker earning approximately £50,000 might see their post-tax income fall from £39,520 to £39,014 annually when adjusted for inflation and projected wage growth. This represents a loss exceeding £500 per year in today’s terms. The impact is expected to be widespread, as approximately seven million individuals in the UK earn over £50,000, with over a million of these residing in London, highlighting the significant reach of this policy across professional sectors.
The core of the problem lies in the static nature of income tax thresholds. The higher-rate threshold, which dictates when individuals begin paying 40% tax, has been fixed at £50,270 since 2022. If this threshold had been adjusted to keep pace with inflation, it would currently stand at over £62,000, providing a much larger buffer for earners.
The Office for Budget Responsibility (OBR) forecasts that this continued freeze will result in an additional 4.2 million people being brought into the income tax system by 2030. Furthermore, an estimated 3.5 million individuals are projected to be pushed into higher or additional-rate tax brackets as a direct consequence of this policy.
Consequently, typical wages for professions such as nurses, electricians, and primary school teachers are predicted to cross the higher-rate tax threshold by 2031. Concerns have also been raised that secondary school teachers, police officers, and individuals earning the average London wage could face this higher tax burden as early as next year, underscoring the immediate and future implications.
In stark contrast to the challenges faced by workers, pensioners and those receiving benefits are anticipated to experience financial gains. The government’s commitment to the state pension’s “triple lock” is projected to result in an annual increase of £306 for millions of retirees by the end of the specified timeframe. Under an enhanced “quadruple lock” safeguard, research from the CPS indicates that some pensioners could be as much as £537 per year better off by 2031.
The state pension is also expected to surpass the tax-free personal allowance next year. This means that, technically, income tax would begin to affect pension income for the first time. However, it has been clarified that individuals whose sole source of income is the state pension will be exempt from this. Similarly, recipients of the standard universal credit are set to benefit, with payments projected to rise by £290 annually by 2031. Those receiving additional benefits, which are all pegged to inflation, will see even greater increases.
Daniel Herring, head of economic and fiscal policy at the CPS, has voiced concerns, stating, “Labour’s tax policy is quietly hammering workers while protecting pensioners and benefit recipients.” He elaborated, “Freezing the personal allowance for income tax will hit everyone, but it’s those who are dragged into higher tax bands who will really suffer – to the point where a worker on £50,000 today is set to actually be poorer in five years’ time, despite getting pay rises.” He further noted, “Meanwhile, the state pension and universal credit will both be worth more in real terms. This is fiscal drag in action, raising taxes for millions of workers through the back door.”
The Treasury has countered this criticism by pointing to other measures introduced in the budget. A spokesperson stated, “In the budget we increased the national living wage and national minimum wage and took £150 off people’s energy bills, extended the freeze on prescription fees [and] fuel duty and froze rail fares for the first time in 30 years. The fair and necessary decisions we made at the budget mean we can deliver on the country’s priorities – cut waiting lists, cut debt and borrowing and cut the cost of living.”
Despite the increasing financial pressure on middle-income earners, Downing Street is reportedly preparing a campaign to highlight the government’s economic achievements. This push aims to emphasize positive outcomes, with plans for interventions from Sir Keir Starmer to stress “government action so far, including an economic approach which has seen six interest rate cuts and inflation starting to fall.” The Prime Minister has declared an “all-out war on the cost of living,” and his chief of staff has described 2026 as the “year of proof,” when voters are expected to experience the tangible effects of the government’s economic policies.
