Chancellor Rachel Reeves is considering a plan to reduce the income tax threshold for higher earners, which experts believe could generate £9 billion for the Treasury. This move would deviate from Labour’s manifesto promises to increase income tax rates. The decision to potentially alter tax policies in the upcoming Budget has raised concerns among Labour MPs and voters.
Speculation suggests that Reeves may have abandoned the initial proposal due to a more positive outlook on public finances than previously anticipated. While the Office for Budget Responsibility now forecasts a smaller deficit of around £20 billion instead of the earlier estimate of £30 billion, tough decisions on tax adjustments and budget cuts still lie ahead for the Chancellor.
One option under consideration, as reported by the Financial Times, involves lowering the income tax thresholds. Currently, individuals enjoy a tax-free personal allowance of £12,570. Income between £12,571 and £50,270 incurs a basic tax rate of 20%, while earnings from £50,271 to £125,140 attract a higher rate of 40%, with an additional rate of 45% applied to incomes exceeding that threshold.
The Resolution Foundation suggests that reducing the higher rate threshold from £50,270 to £46,000 by 2029/30 could potentially yield £9 billion in revenue. This proposal, though different from Reeves’ previous plan to increase income tax by 2p and reduce employee national insurance, could impact around 30% of workers, including many in the public sector.
Economists at Pantheon Macroeconomics propose a more aggressive approach, indicating that decreasing all income tax thresholds by 10% could result in a revenue increase of £17 billion by 2028/29. However, such a measure might face political challenges as it deviates from the original manifesto promises and could affect a wide range of working individuals.
While reports suggest that Reeves may not be inclined to cut income tax thresholds, there is speculation that she might extend the freeze on personal tax thresholds and National Insurance for an additional two years starting from April 2028. This move, labeled a “stealth tax,” could generate £8.3 billion annually by 2030, according to the Institute for Fiscal Studies (IFS).
The IFS warns that continuing the freeze could lead to more individuals, including those on minimum wage and low-income pensioners, becoming liable to pay income tax in the coming years. This scenario could mark a significant tax increase for various employee groups, prompting discussions on the fairness and implications of these potential fiscal adjustments.
