Chancellor Rachel Reeves has announced a two-year extension of the freeze on income tax thresholds, raising an estimated £7.5bn from millions of workers. The move abandons controversial plans to increase the headline rate of income tax, which would have broken a manifesto pledge.
The decision comes as the government seeks to fill a fiscal black hole of around £20bn. The reversal of policy led to a sell-off in the bond market, with investors pushing borrowing costs higher and the pound lower. Treasury sources suggest Reeves is now aiming for an extra buffer of £15bn, but market reaction indicates scepticism.
Other tax rises under consideration include ending tax breaks for salary sacrifice pension schemes, a new tax on electric vehicles, higher taxes on high-value properties, additional taxes on landlords' rental income, and a gambling tax. These measures are expected to raise further funds but may fall short of the required amount.
The decision not to raise income tax rates followed weeks of planning, but a last-minute change of tack after talks between Reeves and Prime Minister Keir Starmer. The episode has weakened Starmer's authority, with some Labour MPs warning against breaking manifesto commitments. Health Secretary Wes Streeting welcomed the decision, emphasising the importance of maintaining voter trust.
