TL;DR
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The Office for Budget Responsibility forecasts that the continued freeze on income tax thresholds could reduce labour supply by 215,000 hours. It says some parents earning above £100,000 may cut their hours to retain childcare support, but the forecast does not establish how many people will do so or how much of the reduction is specifically linked to childcare.
The Office for Budget Responsibility (OBR) forecasts that the continued freeze on income tax thresholds could reduce labour supply by 215,000 hours, as some workers respond to higher effective tax rates by working less. The watchdog said parents close to the £100,000 childcare cutoff may be among those affected, because crossing it can mean losing access to childcare support.
The Chancellor’s Budget kept income tax thresholds frozen until 2031. The OBR says the policy is expected to have an adverse effect on work incentives, as wage growth can push people into higher tax bands even when the thresholds themselves do not rise. This effect is often called fiscal drag.
The OBR forecast a reduction of 215,000 hours of labour supply associated with the threshold freeze. It identified parents nearing the childcare cutoff as a key group, while cautioning that people’s responses are difficult to predict. The watchdog said it was possible that some people earning above £100,000 had reduced their hours to qualify for childcare benefits.
Under the rules described in the report, a parent with adjusted net income above £100,000 loses eligibility for 30 hours of funded childcare and tax-free childcare. The report says the support can be worth up to £2,000 a year. Those parents may also lose child benefit, depending on household circumstances and income. Separately, income between £100,000 and £125,140 can face a high marginal rate because the personal allowance is gradually withdrawn over that range.
How the Freeze Can Change Work Choices
The forecast matters because it links a tax policy that raises revenue to a possible reduction in working hours. When thresholds stay fixed while pay rises, more income can be taxed at higher rates. For some workers, the amount kept from an additional shift, promotion or pay rise may be reduced by tax and by the loss of means-tested or income-limited support.
For parents close to the £100,000 cutoff, the choice can involve more than income tax. Losing childcare assistance may make extra work less financially attractive, particularly when childcare costs are high. The OBR’s estimate signals a potential effect on the total supply of labour, but it is a forecast rather than a count of workers who have already changed their schedules.
The policy also has implications beyond higher-earning parents. The freeze applies across income tax bands, so people whose pay rises can be drawn into tax or higher-rate tax without a formal increase in headline rates. The OBR projects that the overall tax burden will rise to 38.6% of GDP in 2031/32, its forecast peak. That is a measure of tax revenue relative to the economy, not the tax rate paid by an individual.
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Frozen Thresholds and Childcare Rules
Income tax thresholds have been frozen since 2021, when the policy was introduced under then-Chancellor Rishi Sunak. The current personal allowance is £12,570; the higher-rate threshold is £50,270, and the additional-rate threshold is £125,140. The Budget’s extension means those limits will remain in place through 2031, according to the source report.
The OBR’s warning concerns the combined effect of fixed tax thresholds and the separate childcare eligibility rule. The £100,000 cutoff has not risen with inflation. The report says it would be about £137,000 if it had kept pace with inflation since its introduction. That figure is an inflation-based comparison, not a proposed change to the current rules.
The OBR also projects wider effects from fiscal drag. By 2031/32, it forecasts that 6.7 million more people will pay income tax and 5.4 million more will pay the higher rate than if thresholds had risen in line with consumer price inflation. These are projections against a counterfactual scenario, not the number of people newly affected in a single year.
“It is possible that individuals earning above the £100,000 cut-off threshold have reduced their hours worked to receive the childcare benefit.”
— Office for Budget Responsibility
How Many Workers Will Change Hours
The 215,000-hour estimate is a forecast of labour supply affected by the threshold freeze; the source report does not provide a breakdown showing how much is attributable to parents trying to retain childcare support. It is also not a direct survey count of people who have reduced their hours.
The OBR’s wording is conditional: it says it is possible that some people above the cutoff have cut hours. The available material does not say how many households have done so, how the forecast divides across income groups, or whether the projected reduction refers to a particular year or an annual total. The precise behaviour of workers and employers remains uncertain.
The figures on the tax burden and the number of taxpayers are also forecasts based on assumptions about the economy, earnings and policy. They should not be read as guaranteed outcomes. The report’s comparison with inflation-linked thresholds describes an alternative scenario, not a commitment to raise thresholds.
Budget Policy and OBR Forecasts
The threshold freeze is scheduled to continue until 2031 under the Budget plans described in the report. The next relevant updates will come through future fiscal statements and OBR forecasts, which can revise estimates as earnings, inflation and employment data change.
Any change to the childcare cutoff or to income tax thresholds would require a policy decision; the source material does not report a confirmed change. Readers affected by the rules will need to check current eligibility criteria and personal circumstances, since the OBR forecast does not determine an individual household’s tax or childcare entitlement.
Key Questions
What did the OBR forecast about working hours?
The OBR forecast that frozen income tax thresholds could reduce labour supply by 215,000 hours. The source report does not specify a breakdown by worker group or give a clear time window for that figure.
Why might a parent earning just over £100,000 cut hours?
Under the rules cited in the report, adjusted net income above £100,000 can remove eligibility for 30 hours of funded childcare and tax-free childcare. The OBR said it was possible some people reduced their hours to retain support; it did not confirm how many did so.
How long are income tax thresholds due to remain frozen?
The Budget kept the thresholds frozen until 2031, according to the source report. The personal allowance is currently £12,570 and the higher-rate threshold is £50,270.
Is the 215,000-hour figure an observed total?
No. It is an OBR forecast about the effect on labour supply, not a measured tally of hours already cut. The available report does not give a detailed method or a group-by-group split for the estimate.
Source: thisismoney.co.uk
