Labour is expected to prolong an income tax freeze, a measure critics have dubbed a “stealth tax,” in the upcoming Budget, pulling more taxpayers into higher brackets.
According to insiders, Shadow Chancellor Rachel Reeves is likely to extend the freeze on income tax thresholds, a move introduced in 2021, which has led millions to pay more tax without rates officially rising.
The anticipated decision is predicted to generate £7 billion annually for the Treasury but has already drawn backlash for being a discreet method of increasing the tax burden on working people. Some have argued that this action violates Labour’s manifesto pledge not to “increase taxes on working people,” triggering concern over the party’s commitment to keeping their promises.
In response to the brewing controversy, a government source said: “We said we would protect working people and not increase rates of income tax, national insurance, or VAT.” Many interpret this statement as suggesting that Labour does not see extending the freeze as an actual tax hike since income tax rates remain unchanged.
Labour’s Own Criticism Raises Questions
The irony of Labour’s position hasn’t gone unnoticed. When the threshold freeze was initially rolled out in 2021, it was met with fierce opposition from the party. At the time, Reeves condemned the freeze, declaring, “People on average earnings are paying more in tax because they are dragged into higher tax brackets. That is a sign of failure. The government is picking the pockets of working people.”
Fast forward to today, and Labour appears to have adopted the very measure it once attacked. The freeze has been criticized as a convenient way for the Treasury to collect more tax revenue without officially raising tax rates.
Since 2021, the personal allowance has been held at £12,570, while higher rates of 40% and 45% apply to earnings over £37,700 and £125,140, respectively.
Under normal circumstances, these thresholds would rise in line with inflation or average earnings. However, they have remained static and are now set to be frozen until at least 2028. Labour’s current plans could see the freeze extended even further, exacerbating what economists call “fiscal drag.” This phenomenon occurs when inflation causes wages to rise, but income tax thresholds remain stagnant, pushing more people into higher tax brackets.
Fiscal Drag’s Impact on Households
The respected Institute for Fiscal Studies (IFS) has highlighted the financial impact of this freeze on households, projecting that it will reduce household incomes by an average of £1,250 by 2025/26. Analysts noted that the freeze has taken more from workers’ pockets than recent cuts to national insurance and income tax combined.
While recent tax reductions have saved households around £20 billion annually, the income tax threshold freeze is projected to cost them £40 billion. This means that for every £1 households have saved through recent tax cuts, they have effectively lost £2 due to the threshold freeze.
Economists estimate extending the freeze could bring in more than £33.5 billion annually by 2028/29. This financial boost could prove too tempting for Labour to resist, especially as the chancellor prepares the Budget, set to be unveiled on October 30.
Rachel Reeves has faced further criticism recently for reportedly exploring an increase in employer national insurance contributions, another contentious move.
Like the income tax threshold freeze, this potential measure has been denounced as linguistic sleight-of-hand designed to avoid breaking Labour’s campaign promise to protect working people from tax hikes.
Critics argue that the freeze and possible increases in national insurance go against the spirit of Labour’s pledge not to raise taxes. Many see it as an attempt to boost government revenue indirectly rather than directly increasing tax rates. Whether this will sway public opinion remains to be seen, but the controversy surrounding these proposals will likely intensify as the Budget announcement approaches.
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