Chancellor Rachel Reeves is set to raise £7.5bn by freezing income tax thresholds for two years, abandoning plans to increase the headline rate after a sell-off in the bond market. The decision, confirmed by government sources, maintains the level at which people start paying income tax but will draw more revenue due to inflation and wage growth.
Reeves had been expected to raise income tax by up to 2p, potentially alongside a one-year threshold freeze. However, a last-minute change in approach followed a turbulent week for the government, with Prime Minister Keir Starmer facing leadership speculation. The U-turn came after forecasts showed the fiscal black hole was closer to £20bn than £30bn, allowing less radical measures.
The freeze contradicts Reeves' 2024 budget speech, where she argued that extending the threshold freeze would hurt working people. Other likely tax rises include ending tax breaks for salary sacrifice pension schemes and a new tax on electric vehicles, each raising about £2bn. However, these may not be enough to plug the £20bn gap and increase headroom to £15bn, with market reaction suggesting investor scepticism.
Health Secretary Wes Streeting welcomed the decision, having warned against breaking manifesto pledges. Other cabinet ministers also expressed concerns about the political implications of raising income tax rates. The Treasury declined to comment on budget speculation, but Downing Street reiterated the need for stability in public finances.
