Rachel Reeves is expected to extend the freeze on income tax thresholds beyond 2028 in the upcoming Budget pushing thousands more Britons into higher tax brackets.
This move could potentially raise £7bn annually for the Treasury.
The policy, known as fiscal drag, would continue a measure first introduced by former Chancellor Rishi Sunak in 2021. It is set to impact hundreds of thousands of workers across the nation.
As salaries rise with inflation, more Britons will be pushed into higher tax brackets. This stealth tax has become a contentious issue, particularly in light of Labour’s manifesto pledge not to increase taxes on working people.
The decision comes as Reeves grapples with a £40bn shortfall in public finances, reportedly left by the previous Conservative Government.
Fiscal drag occurs when tax thresholds remain the same while wages increase. This policy effectively raises taxes without altering headline rates.
As a result, more workers find themselves paying higher taxes as their salaries rise with inflation.
Stuart Adam at the Institute for Fiscal Studies (IFS) told The Times: “The promise not to increase the basic, higher and additional rates of income tax was carefully worded and deliberately leaves the door open to other changes to income tax that could raise money.”
This interpretation suggests that Labour may have intentionally left room for manoeuvre in their manifesto pledges.
The potential extension of the freeze could see approximately 400,000 more people paying income tax at the basic rate.
Labour’s manifesto pledge not to increase taxes on working people has come under scrutiny in light of this expected move as the party had explicitly ruled out increases to income tax, National Insurance, and VAT.
However, Labour sources argue that freezing thresholds does not constitute a tax rise.
Adam continued: “We said we would protect working people and not increase rates of income tax, National Insurance or VAT.”
Sir Keir Starmer, when pressed on the issue insisted: “We are going to keep our manifesto pledges.”
The Conservatives have accused Labour of breaking promises. Gareth Davies, a shadow Treasury Minister, said: “With less than two weeks to the Budget, it has become clear this Government is planning to break promises they made to the British people.”
Labour had previously criticised such moves as a “stealth tax” when in opposition. However, they did not explicitly promise to reverse this policy.
The Chancellor now faces the challenge of balancing manifesto commitments with the need to address public finances.
Reeves has warned of “difficult decisions” ahead. She aims to find £40bn to avoid real-terms cuts to Government departments.
