Standing in the House of Commons last Wednesday, Rachel Reeves promised to build “a tax system that is fairer for the future”.

However, for many hard-working households, this couldn’t be further from the truth.

Following the Chancellor’s decision to freeze tax thresholds, workers will now effectively be punished for climbing the ladder, with higher wages pushing them into higher brackets.

While the move will allow the Treasury to raise billions of pounds in much-needed revenues, the risk is that Ms Reeves has extinguished ambition as a consequence.

By extending the freeze in thresholds for another three years until 2030-31, it is forecast that an extra 920,000 people will be paying the higher 40pc tax rate, a band initially reserved for those on unusually higher incomes.

Ever since the Tories first froze tax thresholds in 2021-22, workers have paid 40p in the pound once their earnings cross £50,270. Without the policy, this figure would stand at £70,390 by 2031.

According to economists, the impact of this stealth tax is clear.

Tom Waters, an associate director at the Institute for Fiscal Studies (IFS), says that the incentive for middle-class households to earn more will be weaker as they won’t “get to keep as much of an extra pound as they otherwise would”.

This will apply not only to bankers, lawyers and other City professionals, but swathes of everyday workers, Waters adds.

“An increasing fraction of teachers are paying higher rate tax, whereas a few decades ago that would have been very unusual,” he says.

However, it is not only those at the top of the ladder who are affected. Freezing thresholds will also result in more people on low incomes being pulled into paying income tax for the first time.

Greg Thwaites, a researcher at the Resolution Foundation, says this poses a dilemma for those “who are on the margins of working or not working”.

“They’re the people whose decisions have been affected and have been tipped against going to work or working longer,” he says.

Someone on the minimum wage working part-time, earning around £12,000 a year, will have less of a desire to take on extra hours out of fear of crossing the £12,570 threshold at which they start paying income tax, Thwaites says.

This deterrent is also evident higher up the chain, he adds, as successive increases to the minimum wage mean people are less inclined to seek a promotion.

“If you’re earning £12.21 anyway, and then your boss is on £12.70, do you really want all the extra stress of having your boss’s job?” he says.

The backdrop to this debate over tax is an ever-increasing welfare bill.

According to the latest figures from the Office for Budget Responsibility (OBR), benefits spending will be £16bn a year higher in 2029 than was forecast in March.

This is largely owing to the Chancellor’s decision to remove the two-child benefit cap during last week’s Budget, combined with her decision this year to abandon welfare reforms.

The OBR also said it expects the Government to spend an additional £1.4bn on Personal Independence Payments (PIP) by the end of the decade.

These increases have meant the UK’s welfare bill is forecast to rise by £73.2bn to £406.2bn in the next five years.

The jump in welfare costs, at the same time as raising taxes, has prompted concerns about Reeves’s approach.

For young, ambitious employees keen to build a life in Britain, they are growing increasingly wary that it no longer pays to work.

As Sir Mel Stride, the shadow chancellor, puts it: “Instead of controlling spending, Rachel Reeves is punishing aspiration and leaving working people hundreds of pounds worse off.”

He adds: “We must reward work, not those on welfare. Labour is risking a lost generation of workers.”

Compounding fears for young workers is the tight labour market they are entering, particularly graduates.

After borrowing thousands of pounds in student loans, many university leavers are now discovering that many entry-level jobs are barely above the minimum wage.

Unsurprisingly, this is putting many potential students off attending university altogether.

And as if that were not enough of a disincentive for young people, those who graduated from university between 2012 and 2023 are now also facing a new stealth tax.

On Wednesday, the Chancellor announced that the repayment thresholds – the income level at which graduates begin paying back the loan costs of their education – will be frozen at £29,385 for three years from April 2027.

This means that workers with student loans earning above £50,271 are burdened by a marginal tax rate of around 51pc.

Chris Bartlett, a financial planning director at wealth manager Rathbones, warned that this will particularly impact younger people trying to build their careers.

“For every extra pound they earn, over half of it is disappearing, and that’s quite a big deal because it can disincentivise people from wanting to get the next promotion or do some overtime,” he says.

All of which is fuelling an exodus of young people abroad.

Figures released last week showed that a net 110,000 British people aged 16 to 34 emigrated in the year to March, a near record high, according to the Office for National Statistics (ONS).

Driving this is a lack of well-paying jobs, with employers burdened by higher taxes.

This has led to the youth unemployment rate recently hitting 15pc, with more than 700,000 16 to 24-year-olds out of work.

“The Government is simply not going far enough to help young people get back to work,” says Ben Gregg, a senior researcher at the Centre for Social Justice.

As for higher earners, economists are also questioning the so-called £100,000 tax trap.

Bartlett explains that once workers earn above this threshold, their personal standard allowance is tapered off, and they lose 30 hours of free childcare per week.

This means many are turning down a promotion or bonus once they approach the financial cliff-edge, dimming aspirations and casting doubt on Labour’s growth ambitions for the economy.

“Why earn an extra £5,000 because it’s literally going to cost you to go to work,” says Bartlett.

Therein lies the problem. While Reeves’s Budget tax raid has gone some way to fixing the public finances, it may have also killed off aspiration in the process.

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