Millions of UK workers face a significant real-terms income hit due to a major tax policy decision by Chancellor Rachel Reeves, a leading economic think tank has warned.
The 'Stealth Tax' Mechanism
The Labour Chancellor has extended a freeze on income tax and national insurance thresholds until 2031. This policy means that as wages rise with inflation over the coming years, more people will be pulled into higher tax brackets, a phenomenon often described as fiscal drag or a 'stealth tax'.
According to analysis by the Centre for Policy Studies (CPS), this move will disproportionately impact workers while protecting the incomes of pensioners and those receiving benefits from the Department for Work and Pensions (DWP).
The Real-Terms Impact on Households
The CPS calculates that an individual earning £50,000 today will be £505 worse off in real terms by the 2030-2031 tax year. This is despite their salary being forecast to increase by over £6,000 during that period.
In contrast, the think tank states that increases to the standard rate of Universal Credit will leave someone on out-of-work benefits approximately £290 better off by the end of the decade. The state pension is also set to be worth more in real terms.
Daniel Herring, Head of Economic and Fiscal Policy at the CPS, criticised the policy's distributional effect. "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."
Government Defence and Political Context
A Treasury spokesman defended the government's overall budgetary approach, pointing to other measures designed to support households. "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 stated.
The spokesman added that the "fair and necessary decisions" made allowed the government to prioritise cutting waiting lists, debt, and the cost of living.
The policy comes after a period of political contention. Last month, Sir Keir Starmer publicly defended Chancellor Reeves as she faced accusations of misleading the public about a £26 billion 'black hole' in the finances to justify her tax-raising measures.
