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The Office for Budget Responsibility says extending the freeze on income tax thresholds until 2031 could reduce labour supply by 215,000 hours. It says the response may be driven mainly by parents near the £100,000 income limit for childcare support, although the forecast does not establish how many people will cut their hours.
The Office for Budget Responsibility (OBR) has forecast that the Government’s decision to keep income tax thresholds frozen until 2031 could reduce labour supply by 215,000 hours. The watchdog says the projected effect on work incentives may be driven mainly by parents whose earnings approach the £100,000 limit for childcare support.
The OBR describes the effect of frozen thresholds on work incentives as adverse. Its forecast is that people will work fewer hours overall, but the figure of 215,000 refers to hours of labour supply, not a count of workers. The analysis does not say that every affected person will reduce their hours, or specify how many individuals might do so.
Parents with an individual income above £100,000 are no longer entitled to 30 hours of funded childcare or tax-free childcare, which can be worth up to £2,000 a year. They have also passed the income limit for child benefit. The OBR says it is possible some people earning above the childcare cut-off have reduced their working hours to retain the support.
The income tax personal allowance remains at £12,570, while the threshold for the 40 per cent higher rate is £50,270. As wages rise while thresholds stay fixed, more income can be taxed at higher rates. The source report also notes that the personal allowance begins to taper for people earning above £100,000 and is fully withdrawn at £125,140, producing a high marginal tax rate over that range.
How Frozen Thresholds Affect Work
The forecast matters because the threshold freeze can affect both the amount of tax people pay and their decisions about work. When earnings increase but tax thresholds do not, some workers move into higher tax bands without a tax-rate change. This process, known as fiscal drag, can reduce take-home pay relative to what it would have been if thresholds had risen with prices.
For some parents, the calculation may also involve the value of childcare support. Crossing the £100,000 eligibility limit can mean losing benefits, so an extra amount of earnings may coincide with a loss of support. The OBR’s assessment suggests that this interaction could affect working hours, though it does not quantify the number of parents who would respond in that way.
The policy also has public-finance consequences. Frozen thresholds bring in more revenue as incomes rise, while the OBR’s wider projections point to a rising tax burden. The source report says the Treasury could receive as much as £55 billion a year by 2030 from frozen thresholds; that is a reported estimate, not a separate figure for the projected reduction in labour supply.
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The Threshold Freeze and Childcare Limit
Income tax thresholds have been held at their current levels since a freeze introduced in 2021. The latest Budget decision keeps the freeze in place until the end of the decade, with the source material specifying 2031. The policy applies across tax bands, not only to people on high incomes, as pay increases can bring more earnings into taxable or higher-rate bands.
The £100,000 childcare limit has not risen in line with inflation, according to the report. It says that if the limit had tracked inflation since it was introduced, it would be about £137,000. That is an illustrative inflation-adjusted estimate; it is not the current eligibility threshold. The same report gives inflation-adjusted comparisons for tax thresholds, but those figures do not alter the rules currently in force.
The OBR’s forecast forms part of its analysis of the Government’s fiscal plans. It also projects that the tax burden will rise from 36 per cent of GDP in 2025/26 to a peak of 38.6 per cent in 2031/32. Those are projections rather than final outturns, and they describe tax receipts relative to the economy, not the tax rate paid by an individual household.
“The threshold freezes could have an “adverse effect” on work incentives.”
— Office for Budget Responsibility
How Many Workers May Change Hours
The OBR’s 215,000-hour forecast does not identify the number of workers involved, the occupations or household types affected, or how the change is distributed over time. The source material does not provide a breakdown showing how much of the projected reduction is specifically linked to the childcare cut-off rather than other effects of frozen tax thresholds.
It is also not clear from the report how many parents have already reduced their hours to retain childcare support, as opposed to how many might do so in response to the extended freeze. The OBR’s wording is qualified: it says this response is possible. The forecast should not be read as proof that a particular worker has cut hours or that all people near a tax threshold will do so.
The figures on future tax receipts and the overall tax burden are estimates based on economic and policy assumptions. The source material does not give enough detail to assess how those projections might change if wages, inflation, employment or Government policy develop differently.
The Freeze Runs Through 2031
The announced policy is to keep income tax thresholds frozen until 2031. The OBR’s forecast will be relevant to scrutiny of the Government’s fiscal plans, but the source material does not report a new review date or a separate measure intended to address the predicted work-incentive effect.
Future OBR assessments and updated economic data may show whether the forecast changes as earnings and employment develop. For now, the confirmed development is the continued threshold freeze and the watchdog’s estimate of a possible reduction in labour supply; actual working-hour changes will need to be measured over time.
Key Questions
What did the OBR forecast?
The Office for Budget Responsibility forecast that frozen income tax thresholds could reduce labour supply by 215,000 hours. The figure refers to hours, not the number of workers who may change their schedules.
Why could parents near £100,000 cut their hours?
People with an individual income above £100,000 lose eligibility for certain childcare support, including 30 hours of funded childcare and tax-free childcare. The OBR says it is possible some people above the cut-off have reduced hours to retain that support, but it does not give a count.
How long will income tax thresholds remain frozen?
The Government’s plan, as described in the source report, keeps thresholds frozen until 2031. The personal allowance is currently £12,570 and the higher-rate threshold is £50,270.
Does the forecast mean 215,000 people will work less?
No. The OBR’s figure is a forecast of 215,000 hours of labour supply, not 215,000 people. The available source material does not specify how many workers might alter their hours.
Source: thisismoney.co.uk
