Chancellor Rachel Reeves is set to raise £7.5bn from millions of workers by freezing income tax thresholds for two years in the upcoming budget, according to government sources. The move comes after she abandoned plans to increase headline income tax rates, which would have broken a manifesto promise.
The two-year freeze on thresholds will effectively increase the tax burden as wages and inflation rise. This decision marks a U-turn from Reeves' position in 2024 when she argued that extending the threshold freeze would hurt working people.
Other measures expected to raise revenue include ending tax breaks for salary sacrifice pension schemes (estimated £2bn) and a new tax on electric vehicles (also £2bn). Additional possibilities include higher taxes on high-value properties, rental income, and gambling.
The Treasury declined to comment, but sources said the change in approach followed revised forecasts showing a smaller fiscal gap of around £20bn rather than £30bn. Reeves is seeking an extra buffer of £15bn, but the smaller-than-expected tax rise led to a sell-off in bond markets, pushing borrowing costs higher and the pound lower.
The decision was made after talks between Reeves and Prime Minister Keir Starmer on Wednesday, the same day Starmer denied reports of a leadership challenge. Health Secretary Wes Streeting, touted as a potential challenger, welcomed the decision not to break the manifesto pledge, stressing the importance of rebuilding trust in politics.
