Chancellor Rachel Reeves is considering a potential £9 billion boost to the Treasury by lowering the income tax threshold for higher earners. This move would deviate from Labour’s manifesto, raising concerns among MPs and voters.
Speculation suggests that Reeves may have abandoned the plan due to improved financial forecasts from the Office for Budget Responsibility, indicating a smaller deficit than previously anticipated. However, tough decisions loom for the Chancellor regarding tax increases and budget cuts.
According to the Financial Times, one proposal involves decreasing income tax thresholds. Currently, individuals enjoy a tax-free personal allowance of £12,570. The basic rate of 20% applies to earnings between £12,571 and £50,270, with higher rates of 40% and 45% for income above these thresholds.
The Resolution Foundation proposes reducing the higher rate threshold to £46,000 by 2029/30, potentially generating £9 billion. This could surpass the £6 billion expected from Reeves’ initial plan of a 2p income tax increase and a corresponding cut in employee national insurance.
While targeting higher earners could protect many lower-income individuals, about 30% of workers, including public sector employees, might be affected. Pantheon Macroeconomics experts suggest that a 10% reduction in all income tax thresholds could yield £17 billion by 2028/29, though such a move could face political challenges.
Reports indicate that Reeves may opt to extend the freeze on personal tax thresholds and National Insurance, potentially raising £8.3 billion annually by 2030. This strategy, labeled a “stealth tax,” could lead to more individuals being taxed at higher rates as incomes rise.
The Institute for Fiscal Studies warns that continued freezes could result in minimum wage earners becoming liable for income tax with minimal work hours. Furthermore, an increasing number of new state pension recipients might face taxation by 2027/28.
Matthew Oulton of the IFS highlights the significant revenue potential and progressive impact of extending tax threshold freezes. This approach could affect a wide range of workers and pensioners, potentially reshaping the tax burden under the Chancellor’s fiscal strategy.