A leading think tank has accused Chancellor Rachel Reeves of "quietly hammering" workers with a prolonged freeze on income tax thresholds, warning that millions will be worse off in real terms by the end of the decade.
The Mechanics of Fiscal Drag
In her November 2025 Budget, Chancellor Reeves extended a freeze on income tax and National Insurance thresholds until 2031. This policy, known as fiscal drag, means that as wages rise with inflation, more people are pulled into higher tax brackets or start paying tax for the first time, effectively increasing the Treasury's tax take without explicitly raising rates.
According to analysis by the Centre for Policy Studies (CPS), this freeze will have a significant impact on workers' take-home pay. The centre-right think tank used Office for Budget Responsibility forecasts for inflation and wage growth in its calculations.
Winners and Losers: A Stark Divide
The CPS report paints a contrasting picture for different groups. For a worker earning £50,000 today, the situation is bleak. Despite their salary being forecast to increase by over £6,000 by 2030-31, the frozen thresholds mean they would be £505 worse off in real terms.
In stark contrast, the analysis suggests a "rather sunnier" outlook for pensioners and some benefit recipients. Thanks to the state pension triple lock, a pensioner could be at least £306 better off in real terms by 2030-31 compared to 2025-26. If the Chancellor follows through on hints to exempt the state pension from income tax even after it crosses the personal allowance, that gain could rise to £537.
Similarly, planned increases to the standard rate of Universal Credit mean someone on out-of-work benefits could be £290 better off in real terms by the end of the decade.
Political and Fiscal Repercussions
Daniel Herring, Head of Economic and Fiscal Policy at the CPS, was highly critical of the policy. "Labour’s tax policy is quietly hammering workers while protecting pensioners and benefit recipients," he said. "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."
The freeze is a major revenue-raiser for the Treasury, expected to generate around £23 billion for the Exchequer in 2030-31. At the time of the Budget, Chancellor Reeves stated she was "asking everyone to make a contribution" to fund public services and investment.
A Treasury spokesman defended the government's approach, highlighting other measures from the budget: "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, 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."
The analysis underscores the long-term impact of threshold freezes, revealing a growing divide between those reliant on earnings from work and those whose income is linked to state guarantees.
