We investigate the progression of income inequality in Denmark over the years 1987–2021. During this time, we observe a consistent rise in inequality in household disposable income. This rise is influenced by shifts at both the high and low ends of the income spectrum, despite the fact that inequality in gross earnings remained unchanged up until 2008. The growing inequality in household disposable income coincides with various policy reforms aimed at enhancing incentives for employment. These changes include the reduction of the marginal tax rate on earned income and a decrease in the generosity of unemployment benefits and other forms of social assistance. At the same time, Denmark has experienced a noticeable increase in immigration, particularly from non-Western countries and Eastern Europe. Immigrants, who rely more heavily on social transfers, find themselves increasingly at the lower income levels. Our analysis underscores that while the policy reforms were designed to encourage employment, they have also led to heightened inequality in disposable income.