The tax freeze was brought in by the Conservatives in 2021-22 and extended to 2028 – however, the Chancellor has announced it will now run through to 2031
Millions are at risk of losing over £500 annually by the end of the decade due to the tax decisions made by Rachel Reeves, according to recent analysis. This figure is based on the assumption that Rachel Reeves will proceed with a planned freeze on tax thresholds, as announced in her November budget.
The scheme was originally introduced by the Conservatives for 2021-22 and extended until 2028. The Chancellor has now declared that this freeze will continue until 2031.
Analysis from the right-wing think tank, the Centre for Policy Studies (CPS), suggests that workers earning approximately £50,000 will experience a decrease in their real, post-tax income over the next five years, despite anticipated pay rises and inflation-linked increases.
After adjusting for projected inflation and wage growth, the post-tax income for someone earning around £50,000 is expected to fall from £39,520 to £39,014 – a loss of more than £500 per year in today’s terms. Approximately seven million people earn more than £50,000, including over a million in London, indicating that the impact will be felt widely across professional Britain.
The issue arises from the ongoing freeze on income tax thresholds. The higher-rate threshold – the point at which earners begin paying 40% tax – has remained at £50,270 since 2022. If it had increased with inflation, it would currently be over £62,000.
The Office for Budget Responsibility forecasts that by 2030 the policy will drag an additional 4.2 million people into the income tax net, with 3.5 million forced into higher or additional-rate brackets.
Consequently, the typical wages of nurses, electricians and primary school teachers are set to cross the higher-rate threshold by 2031. Secondary school teachers, police officers and anyone earning the average London wage will face this burden as early as next year, it is feared.
In stark contrast, pensioners and those on benefits stand to gain. The state pension’s “triple lock” means millions of retirees will pocket an extra £306 annually by the end of this timeframe, it is forecast. Under enhanced safeguards termed a “quadruple lock”, CPS research reveals some pensioners will be £537 a year better off by 2031.
The state pension is also poised to exceed the tax-free personal allowance next year, meaning income tax would technically bite for the first time. Nevertheless, Reeves indicated following the Budget that those whose only income is the state pension would be spared. People receiving the standard universal credit rate will also benefit, with payments climbing by £290 annually by 2031. The amount will be greater for those getting additional benefits, all of which are pegged to inflation.
Daniel Herring, head of economic and fiscal policy at the CPS, said: “Labour’s tax policy is quietly hammering workers while protecting pensioners and benefit recipients.
“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.
“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 dismissed the criticism, highlighting other measures unveiled at the Budget. A spokesperson said: “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 growing strain on middle-income earners, Downing Street is gearing up for a fresh campaign to promote Labour’s economic achievements. Downing Street is preparing a push to highlight the winners, with Sir Keir Starmer planning a series of interventions to stress “government action so far, including an economic approach which has seen six interest rate cuts and inflation starting to fall.”
The PM told the Daily Mirror he is launching an “all-out war on the cost of living,” while his chief of staff Morgan McSweeney has described 2026 as the “year of proof,” when voters are expected to feel the effect of the government’s policies.
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