Chancellor Rachel Reeves is poised to enact a significant stealth tax that will impact an estimated one in five adults across the United Kingdom. The move involves extending a freeze on income tax thresholds, a policy that will see millions of workers paying more tax as their wages rise.
The Mechanics of the Stealth Tax
The central policy is the extension of the income tax threshold freeze, which will now remain in place until 2030. This measure was originally implemented by the Conservative government in March 2021 and was set to last until the 2027-28 tax year. Chancellor Reeves is expected to confirm an additional two-year extension in her upcoming Budget.
By freezing the thresholds at their current levels, the government engages in a process known as 'fiscal drag'. As salaries increase over time due to inflation and pay rises, more individuals are pushed into higher tax brackets. This means a greater number of workers will start paying the 40 per cent higher rate of income tax, even if their real-term living standards haven't improved proportionally.
Financial Impact and Scale
The scale of this measure is substantial. The extension is forecast to raise approximately £8.3 billion per year for the Treasury. Cumulatively, the overall stealth raid by HMRC is projected to generate a staggering £42.9 billion in additional tax revenue by 2027-28, according to the Office for Budget Responsibility (OBR).
In human terms, this policy will directly affect around 10 million people across the nation. This figure is equivalent to almost 20% of the UK adult population, underscoring the widespread financial impact of the decision.
Expert Warnings and Political Fallout
The decision has drawn sharp criticism from economic experts and political opponents. Helen Miller, director of the Institute for Fiscal Studies (IFS), suggested that the government's avoidance of increasing direct income tax rates might lead them to rely on smaller, more damaging taxes. She cautioned that markets could interpret this reversal as evidence that the government is “reluctant to do politically difficult things,” potentially leading investors to demand higher returns when lending to the government.
John Clamp highlighted the insidious nature of frozen thresholds, describing them as “annual tax rises without many taxpayers even realising.” He argued that this approach risks significantly eroding public trust in the entire tax system.
The political opposition has been vocal. Sir Mel Stride, the Conservative shadow chancellor, condemned the move, stating that extending the freeze would be a direct blow to the living standards of working people. He accused the Chancellor of breaking promises, noting she had previously pledged not to extend the threshold freeze.
