More than eight million people will find themselves paying higher rates of income tax by the end of the decade due to the long-term freezing of tax thresholds, according to the UK’s official forecaster.
In projections released alongside the March spring statement, the Office for Budget Responsibility (OBR) said that 8.3 million people would be pulled into the tax system or pushed into higher tax bands by 2029-30 as a result of so-called fiscal drag — a consequence of earnings rising while tax thresholds remain fixed.
Fiscal drag occurs when tax bands do not rise in line with inflation or wages, effectively increasing the government’s tax take without raising headline rates. Often referred to as a “stealth tax”, it can go unnoticed by many workers, who only feel the impact once larger portions of their income are taxed at higher rates.
Threshold freezes, introduced by Rishi Sunak in 2021 during his time as chancellor, were intended to restore public finances post-pandemic. The policy has since remained in place, despite record wage growth and inflation. Had tax bands kept pace with inflation, the number of income taxpayers would be 37 million by 2029-30, according to the OBR — instead, it is forecast to hit 41.1 million.
Think tanks are divided over the approach. The Institute for Fiscal Studies has described frozen thresholds as a “stealthy” method of raising revenue, while the Resolution Foundation argues that it is a more progressive way to increase government income, particularly as higher earners end up contributing more.
Chancellor Rachel Reeves has committed to ending the freeze from 2028-29. But until then, the OBR forecasts that the UK’s overall tax burden will continue to rise, hitting its highest level since the Second World War. This comes despite the Labour government’s pledge not to raise the main rates of income tax, national insurance or VAT for “working people”.
In her first budget last October, Reeves announced a £25 billion increase in employers’ national insurance contributions and confirmed the freeze would remain in place for several more years. While her March spring statement included £5 billion of welfare-focused spending cuts, she retained a £9.9 billion margin under her main fiscal rule — to fund day-to-day spending from tax revenue.
That narrow fiscal headroom has prompted concerns in financial markets and among economists, particularly with pressure mounting for increased government spending in areas such as defence, health, and long-term growth investments. The situation is expected to place further strain on the chancellor ahead of the autumn budget.
Responding to the fiscal drag forecasts, the Treasury said: “This government inherited the previous government’s policy of frozen tax thresholds. At the budget and the spring statement, the chancellor announced that we would not extend that freeze. We are also protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of income tax, employee national insurance or VAT. That’s the ‘Plan for Change’, protecting people’s incomes and putting money into people’s pockets.”
The fiscal drag effect has been intensified by a period of rapid wage growth and high inflation. Wage growth peaked at 8.9 per cent in 2022 as inflation reached a 40-year high of 11.1 per cent in October of that year. Although inflation has since eased to 2.6 per cent, the legacy of frozen thresholds means millions will continue to feel the pinch in the years ahead.
Read more:
Fiscal drag to push 8.3 million more Britons into higher tax brackets by 2030
