UK households should brace for a thin stretch. After Wednesday’s Budget on 26 November 2025, the OBR expects real household disposable income per person to increase at roughly 0.5% a year on average over the next five years. IFS Director Helen Miller called that outlook “truly dismal” and argued that freezing thresholds and adding National Insurance to some pension salary sacrifice breaches Labour’s promise not to raise taxes on working people.

Freezing income tax and National Insurance thresholds until April 2031 means more of every pay rise is taxed. The extension, announced this week, is projected to pull about 1.7 million more people into higher‑rate bands by 2030–31 and raise roughly £12.4bn that year, all without changing headline rates. That is fiscal drag by design.

From April 2029, NI will apply to salary‑sacrificed pension contributions above £2,000 a year. For a £50,000 earner putting £3,000 through salary sacrifice, the £1,000 above the cap would attract 8% NI, trimming take‑home by £80. The OBR scores the change at about £4.7bn in 2029–30.

Taken together, the OBR’s figures imply a slow climb in spending power this Parliament. The Resolution Foundation says the current plans point to one of the weakest improvements in living standards on record, with the burden falling more heavily on lower‑income households unless policy shifts.

Miller also sets today’s forecast in context: from the mid‑1980s to the mid‑2000s, living standards typically rose by more than 2% per year across each Parliament. An average of 0.5% is a very different experience for households and for demand‑driven sectors.

Ministers dispute the idea of a broken pledge. Keir Starmer said Labour had kept its manifesto commitments, while Rachel Reeves argued the promise related to rates, not thresholds, and that the choices made were “fair and necessary” to fund the NHS and tackle child poverty.

Alongside tax measures, the Treasury points to near‑term help: NHS prescription charges are frozen under £10, regulated rail fares in England will be frozen for a year from March 2026, there is a £150 energy‑bill reduction, and the 5p fuel duty cut is extended. Useful offsets, but they do not shift the OBR’s medium‑term income path.

For households, the mechanics are simple. With thresholds static and wages normalising, more pay is taxed and more people drift into higher bands. By the end of the decade nearly one in four taxpayers is set to pay the higher rate, according to The Times and the OBR commentary summarised by major outlets.

For markets, flat real income growth usually stretches trading‑down behaviour. Expect staples and value retail to hold up better than big‑ticket discretionary, while travel and hospitality rely on wage momentum to keep volumes. Credit‑sensitive names should watch arrears and revolving credit trends as households smooth consumption.

SME owners and finance teams should plan for bracket creep through 2030–31, model the NI change on salary‑sacrifice schemes from 2029, and review benefits so take‑home pay stays competitive without overcommitting on base salaries. Early modelling reduces the risk of mid‑year payroll shocks.

The bigger question is growth. The IFS argues the government could have gone further on tax reform to lift productivity, alongside competition, regulation and education changes. The OBR, meanwhile, has marked down medium‑term GDP growth after 2025. Without stronger productivity, fiscal drag becomes the default revenue tool-and the squeeze on spending power lingers.

One final macro point: the OBR expects inflation to return close to the 2% target by early 2027. That helps, but with thresholds frozen and wage growth easing from recent highs, the improvement in take‑home pay will feel modest. Watch retail volumes, unsecured credit growth and arrears data for the first hard signals.