In a move that could impact millions of workers, Labour sources have defended a potential extension of the income tax threshold freeze, insisting it does not break their election manifesto promise. Ahead of Wednesday’s budget, Chancellor Rachel Reeves is reportedly considering maintaining the freeze until beyond 2028, as part of an effort to raise an estimated £7 billion by drawing more people into the tax system.
Both Labour leader Sir Keir Starmer and Chancellor Reeves had previously pledged not to increase taxes on working people during the run-up to June’s general election. Despite the threshold freeze pulling more individuals into higher tax brackets due to “fiscal drag” — the process by which people pay higher taxes as their wages rise — Labour insiders stress that the rates of income tax would not increase.
The manifesto, they argue, specifically refers to not raising tax “rates,” meaning that the income tax brackets would remain at 20%, 40%, and 45%. However, as wages increase, more people would find themselves paying higher taxes even if the rates themselves remain unchanged. Critics have suggested that this move, similar to a “stealth tax,” could erode Labour’s broader promise to avoid tax hikes for working people.
Reeves, the country’s first female chancellor, faces a challenging balancing act. She must find £40 billion to avoid real-term cuts to public services while also addressing a £22 billion “black hole” in the public finances. With just over a week left before the budget announcement, difficult decisions loom for the Labour government as it navigates promises and fiscal realities.