Rachel Reeves is reportedly mulling a fresh tax raid as she scrambles to plug a £20 billion black hole in the budget. The Chancellor could extend the freeze on income tax thresholds, thereby pushing people into higher brackets if wages increase – known as fiscal drag. By freezing the thresholds instead of bringing them in line with the cost of living, workers are left with a potential stealth tax on their earnings.
The Tories announced the move in 2021, with Ms Reeves confirming that numerous personal tax thresholds will remain frozen until April 2028, instead of April 2026. However, she could announce an extension of this deadline at her second Autumn Budget later this year, according to a source speaking to The Telegraph.
They told the outlet: “There’s ‘hot’ and then there’s ‘very hot’, and [this option] is on the ‘very hot’ list.”
Extending the freeze would raise around £7 billion a year if it continued until 2030, though it would be controversial as Labour promised not to raise taxes for “working people”.
While the exact deficit is not currently known, most economists predict it to be around £20 billion.
In March, the OBR estimated that fiscal drag would raise an extra £51 billion a year in tax by the end of the decade as 4.1 million extra people will pay the 40% or 45% rate of tax by 2027-28.
Another option would be a raid on pensions, though this reportedly less popular amongst the Treasury.
No decision has currently been made on the Chancellor will raise funds, with a final judgement likley being made depending on the size of the black hole determined by the Office for Budget Responsibility (OBR).
A Treasury spokesperson said: “As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus.
“Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn
“We are committed to keeping taxes for working people as low as possible, which is why at last Autumn’s Budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of Income Tax, employee National Insurance, or VAT.”
