Chancellor maintains tax thresholds amid revenue needs
The extension of the income tax threshold freeze was presented by the Chancellor as part of efforts to ensure a fairer tax system and to address the UK’s fiscal position. The measure is set to continue until 2030–31, with the government expecting it to deliver billions of pounds in additional revenue to the Treasury.
This decision arrives at a time when the government is under pressure to fund rising public expenditure and curb national debt levels. By not increasing the thresholds with inflation, more taxpayers will enter higher tax bands as their nominal wages rise. This mechanism, often described by analysts as a form of “fiscal drag,” quietly increases the tax take without formally raising headline rates.
Rising tax burden for middle-income earners
Freezing the higher-rate threshold at £50,270, instead of allowing it to rise with average earnings, means that a growing number of workers will pay the 40 percent rate historically meant for higher earners. According to projections, an estimated 920,000 additional taxpayers will become subject to the higher rate by 2030–31. Without the freeze, the higher-rate threshold could have reached approximately £70,390 over the same period, analysts suggest.
Tom Waters, an associate director at the Institute for Fiscal Studies, noted that 'the incentive for middle-class households to earn more is reduced, as they will keep less of any extra earnings.' The 40 percent rate increasingly applies to professions such as teachers, who were previously less likely to be affected.
Effects on lower-income households and work incentives
The threshold freeze not only impacts those with higher incomes but also draws more lower-paid individuals into the income tax net. The personal allowance remains at £12,570, meaning more part-time and minimum wage earners will pay income tax for the first time as wages rise. Greg Thwaites, a researcher at the Resolution Foundation, explained that
'workers close to the threshold face a reduced incentive to work extra hours or seek promotions due to the prospect of higher taxation.' This dynamic can deter labour market participation at both entry-level and higher-paid positions, especially as increases in the minimum wage compress differentials between pay bands.
Growing welfare costs and policy choices
In tandem with higher taxes, welfare costs are set to rise significantly. The Office for Budget Responsibility forecasts that annual spending on benefits will be £16 billion higher by 2029 than previously estimated, partly due to the removal of the two-child benefit cap and changes to welfare reforms. Personal Independence
Payments are also expected to increase by £1.4 billion by the end of the decade. Overall, the UK’s welfare spending is now projected to climb by £73.2 billion to reach £406.2 billion within the next five years. Some policymakers have expressed concerns about the dual effect of rising welfare costs and increased taxation on work incentives. Shadow Chancellor Mel Stride argued that 'instead of controlling spending, Rachel Reeves is making working people worse off.' He further stated, 'We must reward work, not welfare,' warning of a potential decline in workforce participation.
Student loan repayments and young workers
The Chancellor’s latest Budget also confirmed that the student loan repayment threshold will be frozen at £29,385 for three years from April 2027. As a result, graduates earning above this level could face a combined marginal tax rate of around 51 percent, factoring in National Insurance and student loan repayments.
Chris Bartlett, financial planning director at Rathbones, observed, 'For each additional pound earned, over half is lost to taxes and repayments, creating a significant disincentive for young people to seek promotions or work overtime.' This situation may contribute to graduates delaying career progression or seeking employment opportunities outside the UK.
Concerns over high income taxation and economic growth
For higher earners, passing the £100,000 income threshold results in the tapering of the personal allowance and loss of certain government benefits, such as free childcare. Financial experts warn this provides further disincentive for pursuing pay rises or accepting promotions, as net gains may be diminished or erased. Recent figures from the Office for National
Statistics show that a net 110,000 individuals aged 16 to 34 emigrated in the most recent year to March, approaching record highs. Youth unemployment has reached 15 percent, with over 700,000 people aged 16 to 24 out of work. Ben Gregg, senior researcher at the Centre for Social Justice, stated, 'The government’s efforts are not sufficiently helping young people enter the workforce.'
Final Summary
The extension of the income tax threshold freeze, combined with rising welfare costs and changes to student loan repayments, is reshaping the UK’s tax landscape. These policies are set to increase the tax burden for a broad range of workers and have prompted concerns regarding labour market incentives and future economic growth. The government faces a challenging balance between strengthening public finances and maintaining incentives for work and aspiration, particularly for young and middle-income Britons who increasingly feel the effects of these measures.
For individuals seeking clarity on how tax changes affect personal finances, tools such as the Pie app can provide valuable guidance and up-to-date information as fiscal policies continue to evolve.
