Labour 'to extend tax threshold freeze', dragging 1m people into higher rates in bid to plug funding gap

18 October 2024, 23:48

Labour are said to be planning to extend a freeze on personal tax thresholds that would act as a "stealth tax".

Chancellor Rachel Reeves is expected to announce the freeze will be extended beyond its original deadline of 2028, which was set by the Conservatives in 2021.

Labour are said to be looking to plug a fiscal gap of around £40 billion at the Budget - with the shortfall to be made up of spending cuts and tax rises.

But the task is complicated on both sides - by government ministers keen for their individual department's spending to be maintained, and by Labour's pledge ahead of the election not to increase taxes on "working people".

Those were identified at the time as income tax, national insurance and VAT.

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Labour's threshold freeze extension is expected to draw as many as £1 million people into paying the higher rate of tax of 40%, the Times reported.

Workers current pay the 20p rate of tax on income over £12,570, 40p above £50,271, and 45p above £125,140. This is supposed to rise in line with inflation. By freezing the rates, the government keeps a bigger proportion of rising wages.

The government is also considering increasing employer national insurance contributions, a move that has raised eyebrows among some onlookers.

But neither policy would strictly break Labour's manifesto pledge, as Ms Reeves would not technically be increasing income tax, nor requiring employees to pay more national insurance themselves.

Starmer said on Friday that the government would keep to manifesto pledges in the Budget.

Asked about whether reported tax changes under consideration would keep to their promise of not increasing taxes for working people, told a press conference in Berlin: "We are going to keep our manifesto pledges."

He added: "I'm not going to pre-empt the individual measures that will be outlined by the Chancellor in due course.

"This is going to be a Budget that will fix the foundations and rebuild our country."

When asked further about potential tax rises, the Prime Minister said that "you'll just have to wait until the Chancellor lays that out in full, but the structure if you like, the framework, is going to be to fix the foundations and to rebuild our country."

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Some economists think the tax threshold freeze extension plan is a good idea, as it could £7 billion, and be reversed if the economy improves in a few years.

"It raises a significant amount of money and it is eminently changeable if good news emerges later in the parliament and close to the next election," an economist from the Resolution Foundation think tank said.

But others have pointed out that Ms Reeves herself criticised the move to freeze tax thresholds when she was in Opposition.

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It comes as Ms Reeves is also expected to raise inheritance tax in the upcoming Budget.

The PM and Ms Reeves are understood to be considering multiple changes to the tax, which currently includes several exemptions and reliefs.

Inheritance tax is charged at 40 per cent on assets above a £325,000 threshold when somebody dies.

Only four per cent of deaths currently result in an inheritance tax charge, which raises the government around £7bn a year.

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Ms Reeves is expected to either increase the headline rate or lower the threshold at which the tax becomes payable.

Alternatively, there could be changes to exemptions and reliefs, such as amendments to rules around gifts that are given while alive.

Another option is alterations to the exemption of businesses and farmland.

Meanwhile fuel duty could also rise by up to 7p a litre, and increased tax on vapes, according to reports.

A Treasury spokesman said: "We do not comment on speculation around tax changes outside of fiscal events."