Extend personal tax threshold freezes

Policy baseline

Budget 2025 extends frozen personal tax and NIC thresholds to 2031. Receipts rise through fiscal drag as nominal earnings grow.

• Affects most workers paying income tax or NICs.
• Receipts grow strongly by 2030-31.
• Real disposable incomes are reduced.

Core trade-offs

The direct beneficiaries are the exchequer and funded services. The costs fall mainly on workers brought into higher tax bands. The main economic question is fiscal drag lowers disposable incomes.

• The exchequer and funded services gain most directly.
• Costs fall mainly on workers brought into higher tax bands.
• Key risk: fiscal drag lowers disposable incomes.

Fiscal impact by 2030-31

-GBP 15.0bn to -GBP 7.0bn. Central estimate: -GBP 12.4bn.

• Positive numbers mean net fiscal cost; negative numbers mean Exchequer savings.
• Main channel is the scored tax, spending or delivery change.
• Offsets depend on tax receipts, behaviour and pass-through.
• Range reflects uncertain implementation and economic response.
• This is not an official costing.

Economic impact by 2030-31

• Jobs: Little direct job effect; sector-specific taxes can reduce hiring in affected industries.
• Wages: Legal taxpayers may shift costs to workers, owners or consumers over time.
• Prices: Some pass-through likely where market power or fixed demand exists.
• GDP / productivity: Usually mildly negative before spending use; stronger if investment or mobility responses rise.

Assessment

This is a real trade-off, not a free gain. The exchequer and funded services benefit, while workers brought into higher tax bands bear most costs. Overall output depends on behaviour, capacity and pass-through.

Confidence: Medium-low. Higher on the policy target and fiscal channel; lower on behaviour, pass-through and economy-wide effects.

Main risks

• Behavioural response: Avoidance, timing and relocation can reduce receipts.
• Incidence uncertainty: Legal taxpayers may shift costs to workers, consumers or investors.
• Investment risk: Higher taxes can reduce investment where returns are mobile.

Safeguards

• Use HMRC microsimulation before legislating.
• Close avoidance routes before rate rises.
• Review receipts and investment annually.

Academic evidence

UK government evidence

Sources

• PolicyLens illustrative scenario methodology for extend personal tax threshold freezes Internal - PolicyLens, 2026
• Budget 2025 policy costings UK government costing - HM Treasury, 2025
• Budget 2025 UK government budget - HM Treasury, 2025
• Direct effects of illustrative tax changes Tax statistics - HMRC, 2025
• Tax Incidence Academic chapter - Kotlikoff and Summers, Handbook of Public Economics, 1987
• Tax by Design Academic review - Mirrlees and review team, Institute for Fiscal Studies, 2011
• Change: Labour Party Manifesto 2024 Party policy source - Labour Party, 2024

Other Labour policies

• Raise employer National Insurance
• Apply VAT to private school fees
• Replace non-dom tax status
• Raise capital gains tax rates
• Extend the Energy Profits Levy
• Capitalise the National Wealth Fund
• Capitalise Great British Energy
• Expand the Warm Homes Plan