This is due to frozen personal tax thresholds that will continue until April 2028, according to the National Institute of Economic and Social Research’s (NIESR’s) quarterly report.
Last week, Chancellor Rachel Reeves announced the thresholds for income tax and National Insurance would eventually be unfrozen for the 2028-29 financial year. The levels will be uprated in line with inflation from that point.
As well as the personal tax threshold impacting households, families in the lowest 10% of earners – earning less than £21,000 – are still struggling with living standards and are earning 20% less than a year before, amounting to £2,500.
Due to the cost of rent and mortgages, the lowest earning 40% of households will see no real benefit from the predicted 2.2% real wage growth that will happen in 2025, the independent research institute found.
Elsewhere, inflation is forecast to exceed 3% in January 2025 and the Consumer Prices Index (CPI) measure of inflation is forecast to remain near the 2% target set by the Bank of England. As it stands, inflation is at 1.7% after a shock fall in October.
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However, experts from the NIESR suggested changes to the Labour Party’s economic policy are required to better protect the poorest families in the UK.
‘Time to throw off self-imposed fiscal straitjacket’
Professor Adrian Pabst, NIESR’s deputy director for public policy, said: “The Government’s focus on faster growth through greater investment is welcome, but some of the tax decisions risk discouraging more business investment while penalising low-income households.”
Pabst added: “It would be better for the living standards of those households that have been hit hardest by the shocks over the past few years if the Government raised income tax for top earners while unfreezing the thresholds. It’s time to throw off the self-imposed fiscal straitjacket and do the right thing for the economy and society.”
Professor Stephen Millard, deputy director for macroeconomic modelling and forecasting at NIESR, believes the Budget was a mixed bag in terms of the outlook for high and low earners over the next few years.
He said: “Last week’s landmark Budget – the first by a Labour Chancellor in 14 years – will boost demand over the next couple of years, implying higher GDP growth and inflation, as well as slow down the fall in interest rates.”
However, Millard said that “the rise in the employer rate of National Insurance contributions will act to reduce job creation over the coming years, which will lead to greater unemployment.”
He added: “More positively, the change in debt target has allowed some increase in public investment, which should help growth. But exactly when and by how much remains to be seen. My hunch is that more needs to be done.”
