Up to one million individuals in the UK could be forced to pay income tax for the first time or be pushed into a higher band, as Chancellor Rachel Reeves considers extending a major tax threshold freeze.
The £30 Billion Black Hole
The Labour government, led by Chancellor Rachel Reeves, is grappling with a £30 billion financial black hole. To help balance the books, the Treasury is reportedly planning to extend the current freeze on income tax thresholds for a further two years, until 2030.
This policy, known as fiscal drag, occurs when tax thresholds remain static while wages rise with inflation, pulling more people into the tax net or into higher tax brackets without an explicit tax rate increase.
Who Will Be Most Affected?
The move is set to have a significant impact on a broad swathe of the population. According to analysis from the Institute for Fiscal Studies (IFS), around 960,000 more people will be affected.
Department for Work and Pensions (DWP) state pensioners and minimum wage earners are identified as being among the hardest hit. The IFS states that the extension would increase tax on most full-time employees, part-time workers, many low-income pensioners, and most minimum wage workers.
Political and Economic Fallout
The potential policy has drawn sharp criticism from the opposition. Conservative Shadow Chancellor Mel Stride condemned the plan, stating it would "drag hundreds of thousands more people into paying tax or into higher bands, taking money from the pockets of hardworking people."
He accused the government of raiding "family pay packets to cover for their own economic failure."
Matthew Oulton from the IFS provided expert context, noting: "The freezes to personal tax thresholds have already represented a huge tax rise. Extending them would raise significant revenue in a broad-based and progressive way."
However, he also highlighted a key criticism, stating that "freezes set many years in advance are not" a reasonable tool, as the final tax burden becomes dependent on the "unknown and unpredictable path of inflation."
The government must now weigh the significant revenue this move would generate against the considerable financial pressure it will place on households across the country.
