A new report says fiscal drag – where frozen tax thresholds pull more workers into higher tax bands as wages rise – will erode living standards for millions over the coming years.

Some of the worst hit will be those earning around £50,000, who face jumping from a 28% combined tax rate to 42% on any income over the higher rate threshold of £50,270.

The analysis, by the Centre for Policy Studies, shows that under Office for Budget Responsibility forecasts for wage growth and inflation, workers earning around £50,000 today will be worse off by 2030, even as pensioners and benefit recipients enjoy real-terms gains.

Pensioners, whose incomes are protected by the triple lock, will be at least £306 better off by 2030/1 in real terms – or £537 better off if the state pension is exempted from income tax. Increases to Universal Credit will increase its value by £290.

Those workers paying only the basic rate of tax will still see their income rise, despite the value of their tax-free personal allowance being eroded. But the real pain will come for those who find themselves being dragged into higher tax bands. 

Some of the worst-hit workers will be those earning around £50,000. That’s because, once they cross over the higher rate threshold of £50,270, they will pay a 42% combined tax rate (income tax at 40% and National Insurance at 2%) on every additional pound earned, compared to 28% combined rate (income tax at 20% and NI at 8%) below the higher rate threshold.

In nominal terms, a worker on £50,000 in 2025-26 who sees their pay rise in line with average wage growth – assuming the OBR’s predictions are correct – would see their salary reach £56,269 in 2030-31.

After tax, they would have £43,193 in take-home pay, up from £39,520. However, once you feed in the OBR’s forecasts for inflation, they would actually be £505 worse off in real terms compared to this year.

The CPS report adds: “For pensioners and those on the standard allowance for Universal Credit, the picture is rather sunnier. Thanks to the triple lock, a pensioner could expect under the OBR’s forecasts to be at least £306 better off in 2030-31 than they are this year (in real terms). 

“But if, as has been mooted, pensioners are exempted from paying income tax on earnings above the frozen Personal Allowance – the so called ‘quadruple lock’ – a pensioner today could expect to be £537 better off. (This would also apply if the Government takes the more limited approach of exempting those pensioners who have no earnings outside the state pension from income tax, as Rachel Reeves has promised: those pensioners would gain £537, while others would be £306 ahead on the state-derived portion of their income, if taxed at the basic rate.)

“Meanwhile, thanks to Labour’s big increases in the standard rate of Universal Credit, someone on out-of- work benefits will receive an extra £290. And of course that number would be higher for those claiming other benefits, assuming they rise as predicted.”