diff --git a/README.md b/README.md
index 31a53acd2..48ec898a1 100644
--- a/README.md
+++ b/README.md
@@ -258,15 +258,36 @@ jobs:
 
 ## Recommended Permissions
 
-In order to add labels to pull requests, the GitHub labeler action requires write permissions on the pull-request. However, when the action runs on a pull request from a forked repository, GitHub only grants read access tokens for `pull_request` events, at most. If you encounter an `Error: HttpError: Resource not accessible by integration`, it's likely due to these permission constraints. To resolve this issue, you can modify the `on:` section of your workflow to use
-[`pull_request_target`](https://docs.github.com/en/actions/using-workflows/events-that-trigger-workflows#pull_request_target) instead of `pull_request` (see example [above](#create-workflow)). This change allows the action to have write access, because `pull_request_target` alters the [context of the action](https://docs.github.com/en/actions/using-workflows/events-that-trigger-workflows#pull_request_target) and safely grants additional permissions. There exists a potentially dangerous misuse of the pull_request_target workflow trigger that may lead to malicious PR authors (i.e. attackers) being able to obtain repository write permissions or stealing repository secrets, Hence it is advisible that pull_request_target should only be used in workflows that are carefully designed to avoid executing untrusted code and to also ensure that workflows using pull_request_target limit access to sensitive resources. Refer to the [GitHub token permissions documentation](https://docs.github.com/en/actions/security-guides/automatic-token-authentication#permissions-for-the-github_token) for more details about access levels and event contexts.
+To successfully add labels to pull requests using the GitHub Labeler Action, specific permissions must be granted based on your use case:
+
+1. **Adding Existing Labels**:
+   - Requires: `pull-requests: write`
+   - Use this if all labels already exist in the repository (i.e., pre-defined in `.github/labeler.yml`).
+
+2. **Creating New Labels**:
+   - Requires: `issues: write`
+   - This is necessary if the action needs to create labels that do not already exist in the repository.
+
+However, when the action runs on a pull request from a forked repository, GitHub only grants read access tokens for `pull_request` events, at most. If you encounter an `Error: HttpError: Resource not accessible by integration`, it's likely due to these permission constraints. To resolve this issue, you can modify the `on:` section of your workflow to use
+[`pull_request_target`](https://docs.github.com/en/actions/using-workflows/events-that-trigger-workflows#pull_request_target) instead of `pull_request` (see example [above](#create-workflow)). This change allows the action to have write access, because `pull_request_target` alters the [context of the action](https://docs.github.com/en/actions/using-workflows/events-that-trigger-workflows#pull_request_target) and safely grants additional permissions.
+
+There exists a potentially dangerous misuse of the `pull_request_target` workflow trigger that may lead to malicious PR authors (i.e. attackers) being able to obtain repository write permissions or stealing repository secrets. Hence, it is advisable that `pull_request_target` should only be used in workflows that are carefully designed to avoid executing untrusted code and to also ensure that workflows using `pull_request_target` limit access to sensitive resources. Refer to the [GitHub token permissions documentation](https://docs.github.com/en/actions/security-guides/automatic-token-authentication#permissions-for-the-github_token) for more details about access levels and event contexts.
+
+### Example Workflow Permissions
+
+To ensure the action works correctly, include the following permissions in your workflow file:
 
 ```yml
     permissions:
       contents: read
       pull-requests: write
+      issues: write
 ```
 
+### Manual Label Creation as an Alternative to Granting issues write Permission 
+
+If you prefer not to grant the `issues: write` permission in your workflow, you can manually create all required labels in the repository before the action runs.
+
 ## Notes regarding `pull_request_target` event
 
 Using the `pull_request_target` event trigger involves several peculiarities related to initial set up of the labeler or updating version of the labeler.
@@ -291,4 +312,4 @@ Once you confirm that the updated configuration files function as intended, you
 
 ## Contributions
 
-Contributions are welcome! See the [Contributor's Guide](CONTRIBUTING.md).
+Contributions are welcome! See the [Contributor's Guide](CONTRIBUTING.md).
\ No newline at end of file
diff --git a/__tests__/labeler.test.ts b/__tests__/labeler.test.ts
index b780c82ff..75d25ef2f 100644
--- a/__tests__/labeler.test.ts
+++ b/__tests__/labeler.test.ts
@@ -1,5 +1,8 @@
 import * as yaml from 'js-yaml';
 import * as core from '@actions/core';
+import * as api from '../src/api';
+import {labeler} from '../src/labeler';
+import * as github from '@actions/github';
 import * as fs from 'fs';
 import {checkMatchConfigs} from '../src/labeler';
 import {
@@ -10,6 +13,7 @@ import {
 } from '../src/api/get-label-configs';
 
 jest.mock('@actions/core');
+jest.mock('../src/api');
 
 beforeAll(() => {
   jest.spyOn(core, 'getInput').mockImplementation((name, options) => {
@@ -159,3 +163,73 @@ describe('checkMatchConfigs', () => {
     });
   });
 });
+
+describe('labeler error handling', () => {
+  const mockClient = {} as any;
+  const mockPullRequest = {
+    number: 123,
+    data: {labels: []},
+    changedFiles: []
+  };
+
+  beforeEach(() => {
+    jest.resetAllMocks();
+
+    (github.getOctokit as jest.Mock).mockReturnValue(mockClient);
+    (api.getPullRequests as jest.Mock).mockReturnValue([
+      {
+        ...mockPullRequest,
+        data: {labels: [{name: 'old-label'}]}
+      }
+    ]);
+
+    (api.getLabelConfigs as jest.Mock).mockResolvedValue(
+      new Map([['new-label', ['dummy-config']]])
+    );
+
+    // Force match so "new-label" is always added
+    jest.spyOn({checkMatchConfigs}, 'checkMatchConfigs').mockReturnValue(true);
+  });
+
+  it('throws a custom error for HttpError 403 with "unauthorized" message', async () => {
+    (api.setLabels as jest.Mock).mockRejectedValue({
+      name: 'HttpError',
+      status: 403,
+      message: 'Request failed with status code 403: Unauthorized'
+    });
+
+    await expect(labeler()).rejects.toThrow(
+      /does not have permission to create labels/
+    );
+  });
+
+  it('rethrows unexpected HttpError', async () => {
+    const unexpectedError = {
+      name: 'HttpError',
+      status: 404,
+      message: 'Not Found'
+    };
+    (api.setLabels as jest.Mock).mockRejectedValue(unexpectedError);
+
+    // NOTE: In the current implementation, labeler rethrows the raw error object (not an Error instance).
+    // `rejects.toThrow` only works with real Error objects, so here we must use `rejects.toEqual`.
+    // If labeler is updated to always wrap errors in `Error`, this test can be changed to use `rejects.toThrow`.
+    await expect(labeler()).rejects.toEqual(unexpectedError);
+  });
+
+  it('handles "Resource not accessible by integration" gracefully', async () => {
+    const error = {
+      name: 'HttpError',
+      message: 'Resource not accessible by integration'
+    };
+    (api.setLabels as jest.Mock).mockRejectedValue(error);
+
+    await labeler();
+
+    expect(core.warning).toHaveBeenCalledWith(
+      expect.stringContaining("requires 'issues: write'"),
+      expect.any(Object)
+    );
+    expect(core.setFailed).toHaveBeenCalledWith(error.message);
+  });
+});
diff --git a/dist/index.js b/dist/index.js
index f720b3c7d..a293843c4 100644
--- a/dist/index.js
+++ b/dist/index.js
@@ -1028,6 +1028,7 @@ var __importDefault = (this && this.__importDefault) || function (mod) {
 };
 Object.defineProperty(exports, "__esModule", ({ value: true }));
 exports.run = void 0;
+exports.labeler = labeler;
 exports.checkMatchConfigs = checkMatchConfigs;
 exports.checkAny = checkAny;
 exports.checkAll = checkAll;
@@ -1083,11 +1084,18 @@ function labeler() {
                     }
                 }
                 catch (error) {
-                    if (error.name !== 'HttpError' ||
+                    if (error.name === 'HttpError' &&
+                        error.status === 403 &&
+                        error.message.toLowerCase().includes('unauthorized')) {
+                        throw new Error(`Failed to set labels for PR #${pullRequest.number}. The workflow does not have permission to create labels. ` +
+                            `Ensure the 'issues: write' permission is granted in the workflow file or manually create the missing labels in the repository before running the action.`);
+                    }
+                    else if (error.name !== 'HttpError' ||
                         error.message !== 'Resource not accessible by integration') {
                         throw error;
                     }
-                    core.warning(`The action requires write permission to add labels to pull requests. For more information please refer to the action documentation: https://github.com/actions/labeler#recommended-permissions`, {
+                    core.warning(`The action requires 'issues: write' permission to create new labels or 'pull-requests: write' permission to add existing labels to pull requests. ` +
+                        `For more information, refer to the action documentation: https://github.com/actions/labeler#recommended-permissions`, {
                         title: `${process.env['GITHUB_ACTION_REPOSITORY']} running under '${github.context.eventName}' is misconfigured`
                     });
                     core.setFailed(error.message);
diff --git a/src/labeler.ts b/src/labeler.ts
index 816544390..8f9484f34 100644
--- a/src/labeler.ts
+++ b/src/labeler.ts
@@ -22,7 +22,7 @@ export const run = () =>
     core.setFailed(error.message);
   });
 
-async function labeler() {
+export async function labeler() {
   const {token, configPath, syncLabels, dot, prNumbers} = getInputs();
 
   if (!prNumbers.length) {
@@ -65,6 +65,15 @@ async function labeler() {
       }
     } catch (error: any) {
       if (
+        error.name === 'HttpError' &&
+        error.status === 403 &&
+        error.message.toLowerCase().includes('unauthorized')
+      ) {
+        throw new Error(
+          `Failed to set labels for PR #${pullRequest.number}. The workflow does not have permission to create labels. ` +
+            `Ensure the 'issues: write' permission is granted in the workflow file or manually create the missing labels in the repository before running the action.`
+        );
+      } else if (
         error.name !== 'HttpError' ||
         error.message !== 'Resource not accessible by integration'
       ) {
@@ -72,7 +81,8 @@ async function labeler() {
       }
 
       core.warning(
-        `The action requires write permission to add labels to pull requests. For more information please refer to the action documentation: https://github.com/actions/labeler#recommended-permissions`,
+        `The action requires 'issues: write' permission to create new labels or 'pull-requests: write' permission to add existing labels to pull requests. ` +
+          `For more information, refer to the action documentation: https://github.com/actions/labeler#recommended-permissions`,
         {
           title: `${process.env['GITHUB_ACTION_REPOSITORY']} running under '${github.context.eventName}' is misconfigured`
         }