The OBR worries about fiscal drag - 14th July 2025

The impacts of freezing income tax bands and allowances. In its latest Fiscal Risks and Sustainability Report, the Office for Budget Responsibility (OBR) has made a timely comment on this.

Techlink commented on the OBR’s latest Fiscal Risks and Sustainability Report and the three areas which were the focus of this year’s report. However, the OBR report also includes a final chapter on the wider risks to the public finances and considers how these have evolved. One of the many areas covered is the freeze to personal income tax thresholds.  

The OBR notes that the freeze has “widened the tax base” whereas other measures, such as the capital gains tax (CGT) rate increases, have “focused on raising revenues from a relatively narrow set of high-net-worth individuals”.  

The graph above demonstrates what widening the tax base means in practice. By 2028/29, the freeze will mean: 

• 4.2 million more individuals paying income tax;

• 3.5 million taxpayers pushed into the higher-rate band; and

• 0.6 million dragged into the additional-rate band. 

By 2029/30, assuming indexation resumes in April 2028, the freeze is currently forecast to raise £48.9bn (1.4% of GDP) in that year. This forecast is sensitive to inflation and earnings growth: a single year of one percentage point higher-than-expected inflation would increase the yield by around £2.4 billion by 2029/30 (and vice versa). As a comparison, all the tax-raising measures in the Autumn 2024 Budget are projected to yield £41.2bn in 2029/30. 

At PMQs last week, Kier Starmer refused to rule out an extension of the personal tax freezes, arguing that “No Prime Minister or Chancellor is going to write a Budget in advance”, even though, in answering the previous question he had done just that by saying he stood by the Labour manifesto pledges of no increase to income tax, National insurance (NICs) and VAT.  

While he was leaving room for his Chancellor to add another two years to the freeze, such a move will still be difficult for her. In the last Budget, Rachel Reeves said,  

“Having considered this issue closely I have come to the conclusion that extending the threshold freeze would hurt working people. It would take more money out of their payslips. I am keeping every single promise on tax that I made in our manifesto.  

So there will be no extension of the freeze in income tax and National Insurance thresholds beyond the decisions of the previous government. From 2028/29, personal tax thresholds will be uprated in line with inflation once again. When it comes to choices on tax, this government chooses to protect working people every single time."

There is another potential snag for the Chancellor if she chooses to extend the income tax freeze beyond the next election date to April 2030: the amount raised will probably not be enough. The estimated 2029/30 revenue from an extended freeze is £7bn-£8bn a year. The hole created by the U-turns on winter fuel and disability benefits is £6.25bn, while there are suggestions that the Chancellor will need to find a total of £20bn due to a likely change in OBR growth assumptions.  

Source: Techlink Professional