Chancellor Rachel Reeves has announced a two-year freeze on income tax thresholds in her upcoming budget, a move expected to raise £7.5bn from millions of workers. The decision abandons earlier plans to raise the headline rate of income tax, which would have broken a manifesto promise.
The freeze, set to take effect from April, means more workers will be dragged into higher tax bands as wages rise with inflation. Reeves had previously opposed such a measure, arguing in her 2024 budget speech that extending the threshold freeze would 'hurt working people'.
The U-turn came after a turbulent week for the government, with a sell-off in the bond market pushing borrowing costs higher and the pound lower. Investors had been expecting a larger tax-raising package to address a fiscal black hole of up to £20bn, but Reeves is now targeting a smaller buffer of £15bn.
Alongside the threshold freeze, the chancellor is considering ending tax breaks for salary sacrifice pension schemes, introducing a new tax on electric vehicles, and increasing taxes on high-value properties, rental income, and gambling. Combined, these measures are expected to raise billions more, though analysts warn they may still fall short of market expectations.
Political pressure on Prime Minister Keir Starmer has intensified, with some Labour MPs warning against breaking manifesto pledges. Health Secretary Wes Streeting welcomed the decision, saying trust in politics is low and must be rebuilt. The Treasury declined to comment on specific budget details.
