Announcing a continued freeze on income tax thresholds beyond 2028 in the next Budget would not be a breach of Labour's election platform promise, government sources have insisted.
Ahead of the June general election, leader Sir Keir Starmer and future chancellor Rachel Reeves have pledged “not to raise taxes on working people”.
But a freeze on the threshold could allow the chancellor to raise around £7bn by bringing more people into the tax system.
Reeves is currently trying to find £40 billion through a mix of savings and tax rises which she will announce in the new government's first budget on Wednesday October 30.
The tax thresholds were frozen by the previous Conservative government in 2022, but were due to increase again each year from 2028.
The chancellor is now said to be considering a plan to extend the freeze for the rest of the legislature.
The decision not to raise tax thresholds would continue a process known as “fiscal drag”, in which more people are “driving” into paying taxes, or higher tax rates, as their wages rise and cross immutable thresholds.
If Reeves goes through with his plan, around 400,000 more people will find themselves paying basic rate income tax.
Government insiders insisted this did not breach Labour's manifesto pledge to “not raise taxes on working people”.
Sources point to the manifesto's exact wording that income tax “rates” would not increase.
In other words, in England, Wales and Northern Ireland these amounts would remain – depending on income – at 20p, 40p and 45p.
But as people's salaries rose, so would their tax bill.
In 2019, the Conservatives also pledged not to increase tax “rates” – and subsequently froze the tax thresholds.
At the time, this measure was denounced by the Labor opposition as a “stealth tax”.
However, this is not a situation the party has specifically committed to reversing.
Labor's opponents will say an extension of the freeze would undermine the party's wider promise not to raise taxes on workers.
Reeves has just 11 days to confirm his plans before budget day.
The country's first female chancellor has warned of a £22 billion 'black hole' in the public finances – a gap caused by the rules the government has chosen to follow governing the amount of money it can borrow over the next five years.
Filling this gap would only be enough to “keep public services at a standstill”, the Chancellor said this week.
This means she hopes to find £40 billion to avoid real-terms cuts to government departments.
Reeves warned of “difficult decisions” ahead.
