Income tax ‘stealth’ hikes are set to break Labour’s manifesto today
Income Tax and National Insurance rises are on the table this week (Image: Getty)
A drastic plan to hike Income Tax and National Insurance will see millions of people paying more tax, it will be announced today in Rachel Reeves’ Autumn Budget. Plans for the Chancellor’s spending and taxes for 2026 were published early online minutes before the Chancellor’s speech.
In it, the Office for Budget Responsibility has outlined that, as was rumoured, the Government will freeze Income Tax thresholds beyond 2028, according to plans by Rachel Reeves for this Wednesday’s Budget. The Conservative Government froze the income tax bands until 2028, and now Ms Reeves is set to extend the freeze until 2030.
Financial firm Rathbones estimates that someone earning £100,000 by April 2025 would face an extra tax burden of £4,043, compared with £2,517 if the freeze ends in April 2028.
This is an effective tax increase on Income Tax, as ‘fiscal drag’ forces more people to pay more tax as wages increase but thresholds remain locked in place.
Martin Lewis explained this phenomenon via MSE. He said: “There have not been headline income tax raises for a couple of years because what’s actually happened is they’ve increased income tax revenue via a stealth tax, which is called ‘fiscal drag’.
“Now, that isn’t when chancellors wear rouge. What fiscal drag means is they have frozen all of those thresholds. So let’s take the basic personal allowance, the £12,570.
“If you were earning under that before and your income is increased due to earnings going up and earnings have gone up and inflation gone up, and it puts you above the threshold and they haven’t moved the threshold, suddenly you start paying tax on your earnings, while you haven’t before, even though prices have gone up. Inflation means prices have gone up.
“Which effectively means your earnings are going to be taxed on the same equivalent rate, because all prices have gone up, so with inflation, than they were before.
“And that has happened to every threshold level. And this fiscal drag, freezing the thresholds, is the way that the current Government, the Labour Government and the past Conservative Government, have increased revenue from income tax without changing the tax rates.”
The rumour is according to reporting by Press Association today, which says: “An extension of the freeze on income tax thresholds is also among rumoured measures and would see more people dragged into paying tax for the first time or shifted into a higher rate as their wages go up.”
The Lib Dems have said the move would be “rank hypocrisy” and amount to a “stealth tax stitch-up” by Labour and the Conservatives.
They say extending it for two years will drag another 1.3 million into starting to pay income tax or into the higher rate, on top of 7.7 million already estimated to be hit under the Conservative freeze due to end in 2028.
Lib Dem deputy leader Daisy Cooper said: “A staggering nine million people are now set to be hit by the Conservative–Labour stealth tax stitch-up.”
Helen Miller, director of the influential think tank the Institute for Fiscal Studies, said freezing the income tax threshold would “break the letter” of Labour’s manifesto.
“Assuming that it’s done the same way that it’s been done so far, it will also be a freeze in national insurance thresholds.
“It will therefore also be an increase in National Insurance, and if so, in my mind, it would also break the letter of the manifesto, which said no increase in National Insurance,” she told The Westminster Hour on BBC Radio 4.
