Reeves Freezes Tax Thresholds Income Tax Rate Hike Scrapped in Budget Shake Up

Chancellor Rachel Reeves has opted to place a freeze on income tax thresholds at the core of the upcoming budget, abandoning plans for an increase in the basic income tax rate despite strong indications that such a policy was under consideration. This decision follows improved economic forecasts, but the move unsettled markets and contributed to a drop in the FTSE 100 and increased government borrowing costs.

The freeze on income tax thresholds, which will now extend until 2030, is expected to draw 10.1 million people into higher tax brackets. This figure represents nearly one in five UK adults. The decision, projected to raise £8.3 billion, will result in every adult receiving the state pension paying income tax by the 2027 to 2028 fiscal year. By comparison, just under half of full state pension recipients were subject to income tax in 2022 to 2023.

The chancellor’s approach has been described as a stealth tax, as individuals face higher tax burdens due to rising nominal wages while thresholds stay fixed. Reeves will argue that this measure does not breach Labour’s manifesto pledge, as the main rates of income tax remain unchanged.

The budget, due on 26 November, will also include a mansion tax on high value properties, a renewed focus on pension contribution taxes, charges related to gambling and electric vehicle levies. This collection of new revenue measures has sparked unease within government circles, who have labelled the strategy a political risk and a potential source of instability.

The decision to reverse course on income tax rates came after the Office for Budget Responsibility reported stronger fiscal projections, reducing the shortfall in public finances from £30 billion to £20 billion. Nonetheless, Reeves will still need to find a further £15 billion to support government spending plans.

Successive Conservative governments previously introduced threshold freezes to increase revenue. If maintained to 2030, the freeze will have remained in effect for nine years. Analysts note that by the end of this period, higher rate tax thresholds will approach average earnings levels, dramatically expanding the number of taxpayers affected.

This outcome has drawn criticism from financial commentators, who have described the policy landscape as uncertain and the reversal on income tax increases as disruptive for investors. Recent polling indicates widespread public opposition to direct income tax hikes, placing political pressure on Labour to balance its fiscal strategy with its electoral commitments.