UNDERSTANDING THE ‘SILENT PAY CUT’

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Frozen Tax Thresholds and the Undermining of Pay Reform in Adult Social Care

Care England has published new analysis warning that frozen Income Tax and National Insurance thresholds will remove an estimated £1.4 billion from care workers’ take-home pay before the Fair Pay Agreement, with only £0.5 billion allocated to deliver the reform, even comes into force in April 2028.

Overview

Key findings

Care England’s modelling shows that fiscal drag caused by thresholds remaining frozen until 2031 following the decision taken by this Government in the 2025 Autumn Budget, significantly contradicts the purpose of a National Living Wage; and is instead operating as a “silent pay cut”, leading to sub-inflation pay awards across adult social care, with a growing share of headline pay increases absorbed through higher deductions before they reach workers.

• In 2026/27, frozen tax thresholds will remove the equivalent of around 0.7% of pay from the adult social care workforce, costing workers approximately £230 million in take-home pay that year.
• By 2027/28, the annual loss rises to around £470 million, equivalent to around 1.5% of pay.
• In 2028/29, the first year the Fair Pay Agreement takes effect, frozen thresholds remove around £720 million, equivalent to over 2% of pay. With a cumulative cost since 2025/26 of £1.4 billion.
• By 2029/30, frozen thresholds will be removing the equivalent of over 3% of pay each year, costing close to £1 billion annually, following several years of cumulative losses that cannot be recovered with the FPA settlement.
• Alongside this, frozen employer National Insurance thresholds add an immediate £41 million to provider costs in 2026/27, rising to £176 million per year by 2029/30, with a £430 million cumulative cost over four years.

You can read the analysis in full here

The Problem

Adult social care is entering a critical period. After many years in which low pay, limited progression, and high workforce turnover have been recognised as systemic problems, the introduction of a Fair Pay Agreement represents a clear intention to change course. Improving pay is central to that ambition, both to stabilise services and to recognise the skill, responsibility, and value of care work.

At the same time, the Government has confirmed that Income Tax and National Insurance thresholds will remain frozen until 2031. While this policy applies across the economy, its interaction with low-paid, labour-intensive sectors such as adult social care has significant consequences. As pay rises through successive increases to the National Living Wage, frozen thresholds operate quietly but powerfully, reducing the benefit that workers see in their take-home pay.

In effect, fiscal drag functions as a silent pay cut. Measured in pay terms, frozen thresholds remove the equivalent of around 0.7% of pay in 2026/27, rising to over 2% by 2028/29, and more than 3% by 2029/30, meaning that by the first full year of the Fair Pay Agreement, fiscal drag alone is offsetting a substantial share of the intended uplift. Headline pay rates may be increasing, but a growing proportion of each increase is absorbed through higher deductions before it reaches workers.

This matters because the Fair Pay Agreement is intended to improve living standards, strengthen recruitment and retention, and restore confidence in care work as a viable long-term profession. Without alignment between pay policy and fiscal policy, however, much of that intended improvement risks being eroded before reform even begins.

When Income Tax and National Insurance thresholds are frozen most workers are dragged into higher taxation whether they receive no or modest increases in gross pay. This effect is gradual but builds year on year.

Seen in uplift-equivalent terms, fiscal drag means taking a growing share of each pay increase before it reaches workers. Care workers are often told that increases in the National Living Wage represent meaningful progress. In practice, frozen thresholds mean that only part of each pay rise shows up in take-home pay, with deductions rising at a far higher rate than would have with un-frozen thresholds. Once inflation is taken into account, the real-terms benefit is significantly reduced and, in some cases, eliminated altogether. Over time, this creates a widening gap between policy intent and lived experience, with pay rates rising on paper while household finances remain under sustained pressure.

This is not an issue confined to average earners. Even a care worker paid at the National Living Wage will lose take-home pay each year purely because thresholds are frozen, before any change in hours, role, or seniority. This effect applies whether a worker is part-time or full-time, making it a simple and unavoidable consequence of the tax system rather than individual working patterns.

When these individual effects are aggregated, the scale becomes clear. Fiscal drag removes hundreds of millions of pounds from care workers’ take-home pay each year. By 2028/29, the annual loss is estimated at around £720 million, rising to close to £1 billion per year thereafter. Even if only around 80% of the adult social care workforce were above Income Tax and National Insurance thresholds, reflecting earnings data that places the 20th percentile of care worker pay close to the personal allowance, fiscal drag would still remove hundreds of millions of pounds from care workers’ take-home pay each year by 2028/29.

Crucially, this erosion of pay is immediate and cumulative. In the years leading up to the introduction of the Fair Pay Agreement in April 2028, care workers will already have lost an estimated £1.4 billion in take-home pay as a direct consequence of frozen thresholds. That loss cannot be recovered.

This creates a ‘one step forwards and two steps back’ situation. Funding has been ringfenced in increase pay in the ASC sector, but before its introduction in 2028, fiscal drag will bite and significantly worsen the situation to a degree that the FPA is not set-up to manage. When the first FPA is implemented, the workforce will be in a weaker position having absorbed several years of cumulative losses, such that the FPA will not just struggle to realise the benefits described in the government’s impact assessment, but to simply make up for the worsening of conditions the government will have affected with the next 2-3 years of frozen thresholds before its implementation.

By 2028/29, the year of first Fair Pay Agreement, the contradiction becomes particularly stark. In that year, government funds an initial pay uplift through the Fair Pay Agreement, while frozen thresholds remove a comparable order of magnitude from care workers’ pay packets. The risk is that reform is experienced not as a step change in living standards, but as headline pay rising while real-terms take-home pay remains broadly flat.

Even under more modest projections, in which tax and National Insurance thresholds rise in line with Office for Budget Responsibility CPI projections rather than with NLW-rises, the impact of threshold freezes remains substantial. The cumulative loss to the adult social care workforce would still exceed the £500 million ringfenced for the Fair Pay Agreement in 2028/29 and would rise to more than £1.1 billion by 2029/30. In other words, even a softer fiscal assumption does not resolve the underlying mismatch between pay reform and take-home pay.

The impact is not confined to workers alone. Providers face rising wage bills and escalating employer National Insurance costs while operating within local authority funding frameworks that remain constrained and uneven. The freezing of the Employer National Insurance threshold creates an immediate additional cost of £41.4 million for providers in 2026/27, with the annual impact rising steadily to £176 million by 2029/30. While these costs increase year on year, they are not cumulative. Over the four-year period as a whole, the total additional cost to providers amounts to £430.9 million. These costs fall on businesses facing a substantial shortfall in funding already and are unlikely to be matched by corresponding uplifts in local authority fee rates.

The result is a system in which rising costs are absorbed by providers, improvements in take-home pay fail to materialise for workers, and the credibility of pay reform itself is placed at risk.

The Solutions

The analysis set out above shows that improving pay in adult social care is not simply a question of headline rates. What matters is whether pay reform delivers a sustained and meaningful improvement in take-home pay in practice.

1. The funding envelope for the Fair Pay Agreement must be sufficient to close the gap created by fiscal drag and deliver a genuine increase in pay. Unless the settlement explicitly accounts for the cumulative erosion caused by frozen Income Tax and National Insurance thresholds, the Fair Pay Agreement will deliver a significantly smaller real-terms improvement than intended, limiting its ability to stabilise the workforce.

 

2. Action must begin before the Fair Pay Agreement comes into force. The impact of frozen thresholds is immediate, as well as cumulative. While the Fair Pay Agreement will need to be increased to address the cumulative effect, that funding does not arrive until April 2028, leaving the problem unaddressed as it begins now. The Spending Review therefore represents a vital opportunity to begin bridging the gap now, reducing the scale of losses that the Fair Pay Agreement will otherwise have to overcome at the point of implementation.

 

3. Government should adopt a fiscal mechanism that directly improves care workers’ take-home pay. A more effective approach would be to use the tax system to deliver part of the uplift directly to workers A targeted measure, such as a Care Worker Personal Allowance or targeted National Insurance relief for care workers, would provide a simple and transparent way to ensure that pay reform delivers a meaningful improvement in take-home pay. This approach would ensure that the benefits of pay reform are delivered consistently and immediately, without relying on complex pass-through arrangements.

If the Fair Pay Agreement is to be the cornerstone of the Government’s approach to recruitment and retention in adult social care, it must be capable of delivering real improvements in take-home pay. It is being relied upon to underpin wider workforce policy, including recent decisions on immigration and settlement routes, on the assumption that improved pay will make care work sufficiently attractive to meet demand domestically. Without a mechanism that ensures workers are materially better off in practice, that assumption will not hold. In that context, a targeted fiscal measure to improve take-home pay is not an optional enhancement, but a necessary condition for the Fair Pay Agreement to succeed.

The government appears to have recognised the importance of, and the challenges facing the social care sector, but it has provided additional challenges to workers and providers with an urgency that has been lacking in its approach to supporting improvements in the sector. Ultimately, the success of pay reform will be judged not by policy intent or headline rates, but by whether care workers are genuinely better off in practice. Without sufficient funding, early intervention to stem cumulative losses, and a clear mechanism to translate reform into improved take-home pay, the Fair Pay Agreement risks raising expectations without improving outcomes, leaving the workforce no more secure and the sector no more stable than before.