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The Office for Budget Responsibility says extending the freeze on income tax thresholds could reduce labour supply by 215,000 hours, with parents near the £100,000 childcare eligibility limit a key group affected. The freeze also draws more people into higher tax bands as wages rise, but the OBR’s estimate is a forecast, not a count of confirmed hours already cut.
The Office for Budget Responsibility (OBR) forecasts that keeping income tax thresholds frozen until 2031 could reduce the UK’s labour supply by 215,000 hours, as some workers may cut their hours to limit the tax or benefit consequences of higher earnings. The watchdog says parents close to the £100,000 childcare eligibility limit are a particular concern, though the estimate is a forecast rather than a tally of hours already lost.
The Chancellor’s Budget extended the freeze on income tax thresholds, which have remained at their current levels since 2021. The OBR describes the effect on work incentives as adverse and estimates the freeze could lower labour supply by 215,000 hours. The supplied report does not specify the precise period covered by that figure, so it should not be read as an annual total.
The watchdog said people earning above the £100,000 threshold may reduce their hours to retain access to childcare support. In England, a family loses eligibility for 30 hours of funded childcare and tax-free childcare when one parent’s income exceeds the limit; the report says those benefits can be worth up to £2,000 a year. Affected families may also have already lost child benefit entitlement.
Income tax thresholds are frozen across the tax system, not only for high earners. The personal allowance remains £12,570, while the higher-rate threshold is £50,270. As wages rise, more income can fall into taxed bands even when tax rates themselves do not change. The OBR’s analysis identifies this as a potential disincentive to additional work; it does not establish that every worker facing a higher tax bill will reduce their hours.
How Frozen Thresholds Affect Work
The forecast matters because workers’ decisions can affect both household income and the supply of labour available to employers. If some people turn down extra hours or limit earnings to avoid a sharp change in tax or childcare support, the result may be fewer hours worked than would otherwise have been available. The OBR’s estimate signals a possible response to policy design, not a confirmed change in behaviour across the workforce.
For parents near the childcare limit, the interaction between earnings and support is especially relevant. The report says that someone earning more than £100,000 loses access to specified childcare schemes, while income tax rules can also make additional earnings less attractive. The OBR says it is possible that some people above the cutoff have reduced their hours to receive childcare benefits. That wording is cautious: the watchdog does not say how many parents have made that choice.
The wider fiscal effect is also substantial. The source report says frozen thresholds could generate as much as £55 billion a year by 2030, though this is presented as a potential revenue figure, not a sum solely attributable to workers cutting hours. The OBR forecasts the overall tax burden rising from 36% of GDP in 2025/26 to 38.6% in 2031/32. These estimates show why the policy is significant for public finances as well as individual pay packets.
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A Freeze That Raises Tax Bills
Income tax thresholds have been frozen since 2021, when the policy was introduced under then-Chancellor Rishi Sunak. The latest Budget keeps the freeze in place until 2031. Because thresholds are fixed in cash terms, wage growth and inflation can move more income into taxable bands over time. This effect is commonly called fiscal drag.
The report gives examples of how the freeze can affect different earners. It says a 21-year-old working 40 hours a week on the minimum wage, with annual pay of £27,456 after a 3.9% increase, could pay £700 more in income tax this year and £6,100 more by 2030, assuming pay keeps pace with inflation. Those are calculations reported by This Is Money, not OBR estimates of the labour-supply response.
The same report says the £50,270 higher-rate threshold would be about £64,480 if it had risen with inflation, and that the £125,140 additional-rate threshold was lowered from £150,000 in April 2023. It also reports an OBR projection that by 2031/32, 6.7 million more people could pay income tax and 5.4 million more could pay the higher rate than if thresholds had risen with consumer prices. These are comparisons against an inflation-linked alternative, not forecasts that all affected people will change their working hours.
“The threshold freezes could have an “adverse effect” on work incentives.”
— Office for Budget Responsibility
How Many Workers Will Change Hours?
The 215,000-hour estimate is a forecast, and the source material does not state its exact time period or provide a breakdown by income, occupation or family circumstances. It is not clear how many workers will actually reduce their hours, how many may instead accept higher tax bills, or how the response will vary between households.
The OBR’s statement about parents above £100,000 is framed as a possibility. The material does not quantify how many parents have cut hours to retain childcare support, nor does it give a separate estimate of how much of the projected labour-supply reduction is linked to childcare rather than frozen tax thresholds more generally. The reported potential revenue from the freeze is also not a measure of the net fiscal effect once any changes in work and earnings are accounted for.
The Freeze Runs Through 2031
The policy is scheduled to remain in place until 2031, so workers’ tax liabilities will continue to depend on the frozen thresholds while earnings change. The OBR’s forecasts will provide a basis for later assessments of tax receipts, employment and labour supply, but the supplied report gives no further policy change or review date for the childcare limit.
Future data will be needed to establish whether the predicted response is visible in hours worked and how it is distributed among parents and other earners. The present forecast identifies a risk to work incentives; it does not settle the scale of any real-world change.
Key Questions
What did the OBR forecast?
The Office for Budget Responsibility forecast that the income tax threshold freeze could reduce labour supply by 215,000 hours. The supplied report does not specify the time period for that estimate.
Why might some parents cut their hours?
The OBR says it is possible that some people earning above £100,000 have reduced their hours to retain childcare support. The watchdog has not said how many parents have done so.
What does the threshold freeze mean for workers?
With thresholds held at fixed cash amounts while wages rise, more income can become taxable or fall into a higher tax band. This effect is known as fiscal drag; individual tax bills depend on earnings and circumstances.
How long will the freeze last?
The Budget keeps income tax thresholds frozen until 2031, according to the source report.
Is 215,000 hours a measured total?
No. It is an OBR forecast of a possible labour-supply effect, not a count of hours workers have already cut. The supplied material does not state the forecast’s time window.
Source: thisismoney.co.uk
