Chancellor Rachel Reeves has announced a freeze on income tax thresholds for two years, a move that will raise £7.5bn from millions of workers. The decision, confirmed in the budget, marks a U-turn from plans to increase income tax rates, which would have broken a manifesto promise.
The freeze will generate additional revenue as inflation and wage growth push more people into higher tax brackets. Reeves had previously argued against such a freeze in her 2024 budget speech, saying it would hurt working people. The change in approach came after talks with Prime Minister Keir Starmer on Wednesday, following a turbulent week that included leadership speculation.
The decision to abandon a headline rate rise sparked a sell-off in the bond market, driving up government borrowing costs and pushing the pound lower. Treasury sources indicated Reeves is seeking an extra £15bn buffer for public finances, but some investors remain sceptical about the ability of smaller measures to fill the gap.
Other tax rises being considered include ending tax breaks for salary sacrifice pension schemes and introducing a new tax on electric vehicles, each estimated to raise £2bn. Additional options under discussion are taxes on high-value properties, landlords' rental income, and gambling.
Health Secretary Wes Streeting welcomed the decision, saying he was not in favour of breaking manifesto pledges and stressed the importance of rebuilding trust in politics. Other cabinet ministers had also expressed concerns about the political implications of raising income tax rates.
