Static tax thresholds are pushing borrowers into higher bands and squeezing borrowing ability
Mortgage brokers are preparing for the long-term impact of the Chancellor’s decision to hold Income Tax and National Insurance thresholds at current levels until 203, a policy that appears subtle but is quickly becoming one of the decade’s most persistent affordability pressures.
While tax rates remain unchanged, frozen thresholds mean millions will drift into higher bands as wages rise. The OBR expects the extension alone to raise £12 billion, quietly reducing take-home pay for borrowers already stretched by rising housing costs. For brokers, this stealth squeeze will shape outcomes as much as interest rates, particularly for clients reliant on specialist lenders.
First-time buyers: resilient demand despite tighter budgets
Despite the reduction in real disposable income, first-time buyers are expected to remain highly active. Sam Fox, founder of UK Mortgage Centre, says the freeze “will inevitably squeeze take-home pay in real terms,” but does not expect it to “dampen first-time buyer demand in any meaningful way.”
Katrina Horstead, director of Versed, warns the impact will be felt month-to-month. “Freezing Income Tax and National Insurance thresholds until 2031 is effectively a slow real terms pay cut for many first time buyers,” she said.
Fox notes that motivation, life events and buyer flexibility continue to drive activity. He says lenders are already responding with “more first-time-buyer-specific products, cashback incentives, and free valuations,” as well as affordability levers such as higher income multiples, rental-payment-informed underwriting and longer-term fixed rates.
“First-time buyers have historically been one of the most resilient groups in the market,” he said, though brokers will increasingly rely on affordability-enhancing structures to help them compete.
Specialist borrowers: the emerging pressure point
The most significant disruption from fiscal drag is likely to surface in specialist lending, where affordability margins are thinner and income profiles more complex. Horstead expects demand for specialist products to grow as “more borrowers will fall just outside high street criteria as higher effective taxes squeeze affordability.”
Fox says borrowers with larger balances “might be limited to their options when their deal is due up and those types of clients may have little choice but to stay with their current lenders.” Rising tax liabilities reduce net income, making it harder for some borrowers to return to the high street even if their credit performance has improved.
The result is greater reliance on retention products, not because circumstances worsened, but because fiscal drag quietly narrows affordability headroom.
A quiet tax rise with loud consequences
Charles Calvert, managing director at Easy Mortgages, describes the threshold freeze as “the biggest story in the Budget,” calling it “quietly one of the biggest revenue-raisers in the entire Budget.” He says it is “essentially a tax rise on working people without it showing up in their pay slip,” adding that many clients will be surprised when rising wages fail to boost borrowing power.
What brokers need to prepare for
- More borderline affordability cases
Clients may earn more but still fail affordability tests. - Earlier intervention for specialist borrowers
Reviews may need to begin 9–12 months ahead of maturities. - More creative structuring
Greater reliance on JBSP, income-multiple enhancements and long-term fixes. - Higher retention volumes
More clients unable to move lenders due to reduced net income. - More client explanation work
Brokers will need to address why wages aren’t translating into higher loan amounts.
A shifting market narrative
Fiscal drag may not dominate political debate, but its influence on affordability is already visible. First-time buyers remain resilient and well-served by lender innovation, but specialist clients, often carrying higher balances or variable incomes, may see refinancing options narrow over the coming years.
For brokers, the next six years will be shaped not only by interest rates but by tax bands, disposable income and shifting affordability thresholds. Understanding how the freeze on tax thresholds feeds into lender calculations could be the difference between placing a case or losing one.
