Millions of people in the UK are expected to pay more in taxes over the next five years, according to financial experts. This is because the government has kept the income tax thresholds frozen, even as people’s wages are rising. When wages go up but tax brackets stay the same, people end up moving into higher tax bands and paying more tax — a situation known as “fiscal drag.”
The Office for Budget Responsibility (OBR) says this will affect 8.3 million more people by the 2029-30 financial year. Some experts call this a “stealth tax” because it quietly increases how much tax people pay without changing the tax rates.
At the same time, the OBR also predicts that real household disposable income — which is the money people have left to spend after taxes and inflation — will grow slowly, by about 0.5% per year between 2025 and 2030. This is better than earlier forecasts thanks to stronger wage growth, but it’s still a small improvement, especially after years of financial struggle caused by the cost-of-living crisis. The Chancellor, Rachel Reeves, has said the frozen tax thresholds will finally be lifted in 2028-29.
Here’s a quick reminder of the current income tax bands in the UK:
- You pay 0% on income up to £12,570
- 20% on income between £12,571 and £50,270
- 40% on income between £50,271 and £125,140
- 45% on income over £125,140
Even though the government says living standards will improve faster in this Parliament than the last, the OBR warns that growth in disposable income will drop again — from 2.5% in 2024-25 to nearly zero in 2027-28. That means people might feel better off for a while, but that feeling won’t last long.
One reason for the slowdown is that companies will likely cut back on wage increases as they try to recover profits. Also, higher national insurance costs for employers may be passed on to employees in different ways, which could reduce take-home pay.
The Treasury responded by saying that the current government inherited the decision to freeze tax thresholds from the previous administration. However, they promised not to extend the freeze any further. They also confirmed they won’t increase the tax rates or national insurance, saying their goal is to protect workers’ incomes and give people more money in their pockets.
