Labour Set to Introduce ‘Stealth’ Income Tax Rise in Upcoming Budget
Labour is poised to implement a controversial income tax policy at the upcoming Budget, which some critics have labelled a “stealth tax” that could result in more people facing higher tax rates. According to officials, Rachel Reeves is considering prolonging the freeze on income tax thresholds, a move that has already caused millions of earners to fall into higher tax brackets since 2021.
Reports suggest that extending this freeze could generate £7 billion annually for the Treasury. However, the potential measure has faced backlash from those who view it as a covert method of increasing taxes. Some critics argue that this approach contradicts a key Labour manifesto promise not to raise taxes on working individuals.
In response to these claims, a government source defended their stance, stating, “We committed to safeguarding working people and refraining from hiking income tax, national insurance, or VAT rates.” This statement has been interpreted by some to imply that continuing the freeze would not constitute a tax hike, as the rates would technically remain unchanged.
Criticism from within Labour itself adds complexity to the debate. When the income tax threshold freeze was first introduced in 2021, then-shadow chancellor Rachel Reeves condemned the policy, asserting that it unfairly burdens individuals with average earnings by pushing them into higher tax brackets.
Under the current freeze, the personal allowance stands at £12,570, the threshold at which income tax deductions kick in. Earnings up to £37,700 are taxed at a basic rate of 20%, with higher rates of 40% on earnings up to £125,140, and 45% on earnings exceeding £125,141. Unlike previous years, these thresholds have remained stagnant since 2021 and are projected to continue until at least 2028, with Labour’s proposed extension potentially prolonging this freeze even further.
Economists warn of the consequences of such a policy, citing the concept of “fiscal drag,” where more individuals are pushed into higher tax brackets as incomes rise, but thresholds remain constant. The Institute for Fiscal Studies (IFS) predicts that these freezes could lead to an average household income reduction of £1,250 by 2025/26, surpassing the impact of recent reductions in national insurance and income.
While previous tax adjustments saw households withholding £20 billion annually from the Treasury, the income tax threshold freeze is estimated to cost them £40 billion, resulting in a net loss for taxpayers. Projections indicate that continuing this freeze could generate over £33.5 billion yearly for the government by 2028/29, making it an attractive option for the Chancellor ahead of the Budget on 30 October.
Criticism has also been directed at Rachel Reeves for reportedly exploring an increase in employer national insurance contributions, a move that parallels accusations of linguistic manipulation to avoid breaching manifesto commitments.
The intricacies of the proposed income tax adjustments underscore the significance of the impending Budget announcement and the potential impact on taxpayers and government revenues alike.