Labour’s Budget Plan to Extend Income Tax Threshold Freeze Could Net £7bn Amid ‘Stealth Tax’ Controversy

Labour may hold income tax thresholds steady in the upcoming budget, a tactic previously criticized as a 'stealth tax' during Sunak's tenure. This approach, known as "fiscal drag," could potentially generate around £7 billion annually by gradually subjecting individuals to higher tax brackets as their earnings increase.

Political reporter @robpowellnews

Saturday, October 19, 2024, 11:

Government insiders have indicated that maintaining a hold on income tax thresholds in the budget would not violate Labour's campaign promises.

The existing halt on limits, introduced by the former Conservative administration following the pandemic, is set to end in 2028.

Chancellor Rachel Reeves is now anticipated to extend the current policy until 2030, adding an additional two years to its duration.

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This signifies that the starting points for tax brackets won't increase alongside inflation, consequently pulling hundreds of thousands of individuals into higher tax categories.

Officials have indicated that the wording of the June manifesto, where the party committed to not raising the "basic, higher, or additional rates of income tax", is significant.

This implies that the chancellor is of the opinion that raising the thresholds does not violate Labour's campaign promises, since the tax rates of 20p, 40p, and 45p would stay the same.

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According to the Institute for Fiscal Studies, continuing the freeze could result in an additional 400,000 individuals becoming liable for income tax, with a further 600,000 people moving into higher and additional tax brackets.

The Financial Times, the initial source of the report, indicated that the initiative might generate an annual revenue of £7 billion.

This occurs via a mechanism called "fiscal drag," which involves individuals being pushed into higher tax brackets as their earnings increase over the years.

When Rishi Sunak announced the policy in 2022, Labour criticized it as a "hidden tax on the working class."

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During the 2019 election, the Conservatives pledged to keep income tax rates stable, but they later defended their decision to raise them by citing the significant debts accumulated due to the pandemic.

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The present finance minister is seeking to generate £40 billion via increased taxes and reductions in government spending, with plans to unveil a series of initiatives during the budget announcement on October 30.

Over the weekend, Business Secretary Jonathan Reynolds indicated to Sky News that an increase in employer national insurance contributions would not breach his party's manifesto, highlighting the precise language used in Labour’s campaign promises.

Sources indicate potential changes to fuel duty, inheritance tax, and capital gains tax.

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