Young Professionals Hit by Fiscal Drag Call Reeves Budget a ‘Tax on Ambition’

Young professionals in their twenties and early thirties say Rachel Reeves’s first full Budget has redrawn the line between effort and reward – and not in their favour. For a growing number of Generation Z workers, promotions, pay rises and late nights at the office now come with a question: how much of the extra pound will they actually keep?

The Autumn Budget extended freezes on income tax and national insurance thresholds, locked in higher repayments for student borrowers and raised taxes on savings and dividends. Together, these measures have prompted some younger workers to brand the package a “tax on ambition”, arguing that it targets the path to wealth rather than accumulated riches and may nudge mobile talent towards lower‑tax jurisdictions.

Central to their frustration is the decision to keep income tax and national insurance thresholds fixed until 2031. The personal allowance will remain at £12,570 and the higher‑rate threshold at £50,270, alongside a frozen additional‑rate threshold of £125,140. National insurance bands are held at the same cash levels. As wages rise over time, more people drift into higher tax bands through so‑called fiscal drag. The Institute for Fiscal Studies estimates that by 2029 around 700,000 more people will pay income tax at all, and a further 1m will be higher‑ or additional‑rate taxpayers, with more than a quarter of all taxpayers paying above the basic rate.

For Gen Z, who are only now moving through those bands, that shift is not abstract. Many are also carrying Plan 2 student loans, taken out by those who started university between 2012 and 2023. The Budget froze the repayment threshold for these loans at £29,385 from 2027 for three years, a change the Treasury expects to raise £7.4bn by 2030–31. Above that threshold, borrowers repay 9 per cent of additional income. For a graduate who has been pulled into the 40 per cent income tax band and pays 2 per cent employee national insurance, the combined marginal charge on each extra pound of salary reaches 51 per cent. Earlier modelling by independent economists had already highlighted such rates; the freeze extends their reach and duration.

Critics say that leaves many twenty‑ and thirty‑something professionals facing effective tax rates that would once have been associated with top earners. Some advisers warn that it blurs the line between a loan repayment and a de facto graduate tax, with potential consequences for behaviour: fewer extra hours worked, slower acceptance of promotions and heightened interest in working abroad.

The squeeze is not confined to earnings. From 2026, dividend tax will rise by two percentage points for basic and higher‑rate taxpayers, to 10.75 and 35.75 per cent respectively. From 2027, tax on savings and property income will also increase by two points, taking the basic rate on such income to 22 per cent and the higher rate to 42 per cent. At the same time, allowances will be applied to employment income first, meaning more savings and investment returns fall into these higher bands.

Younger professionals who have begun to build modest portfolios or set aside cash for a first home will also find the tax‑sheltered space for those savings altered. While the overall £20,000 annual ISA allowance remains, from 2027 under‑65s will be able to hold only £12,000 of that in cash; the remaining £8,000 would have to be invested in stocks and shares or other qualifying assets. Over‑65s retain the ability to shelter the full £20,000 in cash ISAs. The Treasury says the reform is intended to encourage productive investment. To younger workers juggling high rents and insecure employment, it looks like a constraint on building low‑risk emergency funds, with an apparent age tilt built in.

From 2029/30, another tool used by better‑paid employees to manage their tax position will be curtailed. Only £2,000 a year of salary sacrifice into pensions will remain exempt from national insurance; contributions above that will attract both employer and employee NICs. Financial planners say this will particularly affect so‑called “HENRYs” – high earners not rich yet – in their late twenties and thirties who have used salary sacrifice to keep taxable pay just below thresholds where child benefit is withdrawn or higher tax bands begin.

The combination of frozen thresholds, higher levies on investment income and limits on tax‑efficient pension saving comes against a backdrop of historically high overall taxation. New measures in the Budget are expected to raise about £26bn a year by the end of the decade, pushing the tax burden to roughly 38 per cent of GDP, a post‑war high. Think‑tanks such as the IFS and the Resolution Foundation argue that extended freezes are a sizeable but opaque tax rise that falls disproportionately on low and middle earners compared with small, explicit rate increases.

Ministers insist the choices are unavoidable. Reeves has argued that “everyone” must contribute to repair the public finances, fund the NHS and pay for policies such as scrapping the two‑child benefit cap, while pointing out that the manifesto pledge not to increase the main rates of income tax, national insurance or VAT has been kept. Budget documents state that graduates “generally benefit from higher earnings” and that expecting them to repay more of their loans is fair.

Opponents contend that younger, upwardly mobile workers are bearing a disproportionate share. Conservative figures have labelled the package a “tax on aspiration” and a multibillion‑pound raid on graduates, warning that it signals “Britain is closed for business”. Financial advisers report growing interest among clients in sectors such as finance, tech and consulting in opportunities in lower‑tax hubs from Dubai to Singapore.

The political test will be whether a generation that entered the labour market after the financial crisis, through a pandemic and into a cost‑of‑living squeeze is willing to accept higher effective tax rates in exchange for the promise of stronger public services and social investment. For now, many of those at the start of their careers say the Budget sends a different message: that in twenty‑first‑century Britain, climbing the ladder comes with a rising toll at every rung.