Chancellor Rachel Reeves is facing intense criticism after a detailed economic analysis concluded her policy of freezing tax thresholds will leave millions of workers financially worse off, while pensioners and benefits claimants see their incomes rise.
The Hidden Impact of Frozen Tax Bands
In her recent Budget, the Labour Chancellor announced a controversial freeze on income tax and national insurance thresholds until 2031. This mechanism, known as fiscal drag, means that as wages increase with inflation, more people will be pulled into higher tax brackets, effectively raising their tax burden without an explicit rate hike.
The Centre for Policy Studies (CPS) think tank has now modelled the real-world impact of this policy. Their analysis, using Office for Budget Responsibility forecasts for inflation and wage growth, paints a stark picture for employed individuals.
An employee currently earning £50,000 would be £505 worse off in real terms by the 2030-31 tax year, despite an expected salary increase of over £6,000. The freeze erodes the value of pay rises through increased tax payments.
Winners and Losers from Labour's Budget
In sharp contrast, the CPS report highlights a "sunnier" outlook for those reliant on state income. Thanks to the government's commitment to the pension "triple lock", which guarantees increases in line with the highest of inflation, earnings growth, or 2.5%, pensioners are projected to be at least £306 better off in real terms.
Similarly, an individual on the standard rate of Universal Credit would see a real-terms gain of approximately £290, due to planned increases in benefit levels. This creates a clear divide, with many workers becoming poorer while those on state pensions or benefits become relatively wealthier.
Daniel Herring, Head of Economic and Fiscal Policy at the CPS, stated: "Labour’s tax policy is quietly hammering workers while protecting pensioners and benefit recipients. Freezing the personal allowance will hit everyone, but it’s those dragged into higher tax bands who will really suffer."
Political Fallout and Treasury Defence
The findings have ignited a political row, with opponents accusing Ms Reeves of breaking a promise not to raise taxes. The freeze is projected to raise around £23 billion for the Exchequer in 2030-31, a significant revenue boost achieved through what critics label a "stealth tax."
In response, a Treasury spokesperson defended the Budget's fairness, pointing to other measures: "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."
They added that the decisions were "fair and necessary" to fund priorities like cutting NHS waiting lists and reducing government borrowing. However, the CPS analysis underscores the long-term, uneven consequences of relying on fiscal drag as a primary tool for balancing the nation's books.
