London, November 28, 2025
UK Chancellor Rachel Reeves has announced in the Autumn Budget 2025 the extension of a freeze on income tax thresholds until 2030, a move set to increase the tax burden on millions of workers by not adjusting thresholds for inflation and thereby eroding future take-home pay.
Extension of Income Tax Threshold Freeze
The most impactful fiscal measure from the Chancellor’s budget is the decision to prolong the freeze on income tax thresholds for an additional two years beyond 2028. Currently, the basic income tax threshold stands at £12,570, and this freeze means that threshold levels will not be adjusted to keep up with inflation over the period. As wages rise nominally due to inflation or pay increases, more individuals will face higher tax rates, despite their real earnings remaining constant.
Fiscal Drag and Its Implications
This policy results in what economists term “fiscal drag” or a “stealth tax,” where individuals gradually pay a greater share of their income in taxes without explicit rate increases. Workers who receive pay adjustments merely reflecting inflation will see diminishing growth in their disposable income as a larger proportion will be absorbed by taxes. Analysts warn that this will predominantly affect middle and lower earners, constraining household budgets and reducing consumer spending power.
Budgetary Context and Financial Gap
The Chancellor’s move addresses a significant fiscal challenge, specifically a £30 billion shortfall in public finances inherited from previous administrations. The government frames the income tax thresholds freeze as a necessary measure to stabilize finances and fund public investment, underscoring a broader agenda aimed at growth through increased spending on infrastructure, housing, education, security, and defence.
Chancellor’s Rationale
Rachel Reeves defended the extension as “fair and necessary,” asserting that the policy responds to public concerns over economic disparity and the ongoing cost of living crisis. She emphasized that the government’s intent is to balance fiscal responsibility with targeted investments to foster long-term economic growth and skills development.
Reactions and Market Adjustments
Critics argue that the freeze disproportionately burdens workers who are not experiencing real wage growth, effectively taxing inflation rather than additional earnings. Moreover, fund managers have started recalibrating their investment strategies, increasing focus on the UK housing market and cyclical equities, signaling expectations of sustained fiscal pressures influencing sectors differently.
The Chancellor’s decision to prolong the income tax thresholds freeze ensures that future salary increments will be trimmed by rising tax liabilities. This approach, while addressing budgetary gaps, places a heavier fiscal demand on a broad swath of the working population, highlighting ongoing tensions between fiscal prudence and household financial resilience in the UK’s economic landscape.