Chancellor Rachel Reeves is set to announce a major fiscal shift in this Wednesday's Budget, opting to extend frozen tax bands rather than implement a direct income tax increase.
The Stealth Tax Mechanism
This strategic move, often labelled a 'stealth tax', allows the Government to significantly boost Treasury revenues without announcing formal tax rate hikes. The policy works by maintaining the income thresholds at which people start paying higher rates of tax. As wages and pensions increase with inflation over time, more individuals are automatically pulled into paying a greater proportion of their income in tax.
The existing freeze on income tax personal allowance and higher-rate threshold was already scheduled to remain until 2028. Chancellor Reeves is now expected to prolong this freeze for an additional two years, securing revenue until 2030.
Impact on Households and Pensioners
This extended freeze will have substantial consequences for millions across the UK. Workers receiving pay rises or promotions are likely to find themselves moving into a higher tax bracket even if their real-terms purchasing power hasn't dramatically improved.
Furthermore, a significant number of pensioners will be affected. As the state pension and other retirement incomes gradually rise, more elderly people will see their earnings exceed the £12,750 tax-free personal allowance, requiring them to pay income tax for the first time.
Political Reactions and Fallout
The policy has already sparked intense political debate. At Prime Minister's Questions last week, Sir Keir Starmer faced pressure but refused to rule out extending the threshold freeze. He defended the Government's position by stating, "What we won't do is inflict austerity on the country as they (the Conservatives) did. What we won't do is go on a borrowing spree like they did."
In response, Tory leader Kemi Badenoch accused the Government of breaking promises, stating, "It is quite clear they are going to freeze thresholds. If she (Reeves) breaks such a clear promise how can the public trust what she says?" This sets the stage for a contentious Budget day on Wednesday, where the full details will be officially confirmed.
