Workers could face larger tax bills after the Budget even though headline income tax rates were left unchanged.
The squeeze will happen quietly as frozen thresholds pull more pay into higher tax bands.
Tom Minnikin, partner at DJH group’s specialist tax firm Forbes Dawson, said Chancellor John Healey had avoided increasing the main rates of income tax, National Insurance and VAT.
However, he warned that keeping income tax thresholds frozen until April 2031 would steadily increase the amount many people hand to the Treasury.
Mr Minnikin told GB News: “Then there is the quiet damage. Income tax thresholds remain frozen until April 2031, silently dragging more people into higher tax brackets.
“A pay rise can leave someone paying a larger share of their income in tax without a corresponding improvement in purchasing power.”
Workers are set to pay £17.4billion more a year in income tax and National Insurance by the end of the decade. The increase comes as frozen tax thresholds quietly pull more people into paying higher rates.
The Office for Budget Responsibility now expects income tax and National Insurance receipts in 2030-31 to be £17.4billion higher than it forecast in March.
The watchdog said rising income tax and National Insurance contributions would be the “single largest driver” behind the growing tax burden, particularly because personal tax thresholds remain frozen.
The impact could be particularly severe for middle earners approaching retirement, according to Ben Klein, senior wealth manager at financial planning and wealth management firm Tideway Wealth.
He said: “This is particularly relevant for people in their forties and fifties earning between £50,000 and £80,000, who are being squeezed from both sides.
“With income tax thresholds frozen until 2031, every pay rise drags more of their salary into the 40% band, while higher living costs eat into whatever is left to save.”
The OBR also warned that the policy could reduce the size of Britain’s workforce by the equivalent of 215,000 workers because higher tax bills may weaken the financial incentive to work.
Worked examples published by Tax Adviser magazine show how large the effect could become by the end of the freeze.
Its modelling assumes that wages rise by four per cent each year and compares the income tax paid under frozen thresholds with the amount due if the thresholds increased in line with inflation.
Someone earning £50,000 in 2025-26 would see their salary rise to £60,833 by 2030-31 under those assumptions.
With frozen thresholds, they would pay £11,765 in income tax that year. If the thresholds had risen with inflation, their bill would be £8,667, leaving them paying an additional £3,097.
The difference is even greater for someone starting on £60,000. Their salary would reach £72,999 by 2030-31, resulting in a tax bill of £16,632 under frozen thresholds.
That compares with £11,624 if the thresholds had risen with inflation, a difference of £5,008.
A worker starting on £80,000 would earn £97,332 by the same point. They would also pay £5,008 more in income tax, with a bill of £26,365 instead of £21,357.
The examples cover income tax only and do not include National Insurance. They are based on four per cent annual wage growth and do not cover Scottish taxpayers.
The pressure on savers will extend beyond frozen income tax thresholds. Tax rates on savings and property income will rise by a further two percentage points from April 2027, on top of increases already scheduled.
Mr Klein warned: “Higher tax on savings income and frozen thresholds make each pound put aside work a little less hard. Planning depends on knowing which rules apply, and when.”
The Chancellor did scrap the planned reduction in the Cash ISA allowance to £12,000 for people under 65. This means everyone will retain the full £20,000 ISA allowance from April 2027, with the freedom to hold the money in cash, investments or both.
The decision could be particularly important for people approaching retirement, many of whom keep enough cash to cover one or two years of spending so they do not need to sell investments when markets fall.
Mr Minnikin described the reversal as “a sensible decision” and said tax-free accounts had become even more important for savers.
Mr Klein urged people to examine their expected income, pensions and savings before changing their financial plans.
He said: “People should establish what their income will look like in 2027/28 from every source, examine how much of their ISA and pension allowances they are using, and seek regulated advice where appropriate before changing their financial plans.”
Mr Minnikin warned that the consequences of the continued freeze could last well beyond the immediate Budget.
He concluded: “With growth remaining sluggish, it means Brits potentially face another decade of austerity.”
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