Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
UK chancellor Rachel Reeves is expected to prolong a freeze on personal tax thresholds beyond 2028 in a “stealth” tax move that could raise £7bn a year and help plug a £40bn fiscal shortfall.
Government officials said Reeves was looking to lengthen the freeze — announced in 2021 by the then Conservative chancellor Rishi Sunak but due to expire in 2028 — in what will be seen as a covert rise in income tax.
One person briefed on Reeves’s thinking said the decision would not break Labour’s manifesto tax pledges, which only specifically ruled out an increase in income tax rates.
“We said we would protect working people and not increase rates of income tax, national insurance or VAT,” the person said, adding that a continuation of the Tory freeze in income tax and national insurance thresholds would help plug the yawning fiscal gap identified by Reeves.
A further two-year freeze to the thresholds for personal tax would raise about £7bn in 2029-2030, according to the Resolution Foundation think-tank.
The Treasury declined to comment on “Budget speculation”.
“It’s a no-brainer,” said Rob Holdsworth at the Resolution Foundation. “It raises a significant amount of money and it is eminently changeable if good news emerges later in the parliament and close to the next election.”
The freezes to income tax and national insurance thresholds date back to 2021, when Sunak was attempting to build revenue in the aftermath of the Covid-19 shock.
The freezes mean thresholds are not adjusted for the impact of inflation, which pushes people into higher tax brackets — a phenomenon known as “fiscal drag” — and increases government revenues.
This has helped drive Britain’s tax burden upwards towards 80-year highs, with many people traditionally considered middle earners now paying the higher tax rate.
In an analysis in March, the Office for Budget Responsibility showed that threshold freezes were the biggest driver behind forecast increases in the tax burden.
Tax as a share of GDP is expected to rise to 37.1 per cent of GDP in 2028-29, it said, some four percentage points above the pre-pandemic level.
Since fiscal drag does not involve changing headline rates, it has generally not provoked the public opposition generated by more explicit tax-raising measures.
However, the freezes are also bringing more people into paying income tax.
Two-thirds of the adult population is set to pay income tax in 2027-28, compared with 58 per cent before the freezes started, according to the Institute for Fiscal Studies.
It added that the number of people paying higher or additional rates of income tax had more than doubled since 2010.
Former Tory chancellor Jeremy Hunt said that voters would be aggrieved if Labour prolonged the freeze beyond 2028.
Reeves’s allies have already indicated she is planning to make another big tax move by increasing national insurance paid by employers, but not employees.
“I would be surprised if they did this because Rachel Reeves is already breaking one big tax promise,” Hunt said.
Reeves’s team insisted the NI rise for employers was not excluded in the Labour manifesto.
Supporters of Reeves noted that the Conservatives promised at the 2019 election not to increase income tax but froze allowances only two years later.