In summer, the Exposé published an article warning that Labour were likely to secretly raise billions in tax revenue from workers by freezing income thresholds and dragging more earnings into higher brackets. As of Monday this week, Rachel Reeves delivered a pre-budget speech outside Number 10 hinting at exactly that. It also sounds like the UK is heading for the first increase in income tax rates since the 1980s in a desperate U-turn for the Labour government who are otherwise hamstrung by their own failed manifesto promises.
The matter of implementing tax changes is a matter of when rather than if, and it will cost you thousands.
Rachel Reeves’ U-turn Adds to Labour’s Embarrassment
The Chancellor stepped outside Number 10 on Monday and delivered a set-piece on “everyone doing their bit”. She refused to rule out rises to income tax, VAT, or National Insurance. She tried to keep messaging ahead of her budget vague, but the direction is clear. The message was that contributions must increase and that “difficult choices” are coming soon. Reports outline that what Reeves is alluding to is yet another threshold freeze, as well as direct changes to the rates themselves for the first time in 40 years.
Her pitch was made as a “responsible” response to high debt, even though the debt burden was well known when Labour’s promises were originally made in their manifesto. Insiders treat her remarks as early warnings that higher personal taxes are on the horizon, and financial analysts are already calculating how many thousands in extra tax these changes will add to everyone’s bottom line. Even without the rate increase, the freezing of thresholds – which, at this point, is all but guaranteed – will continue to dwindle working people’s spending power and give everyone in the country a real-terms pay cut. This government is as unpopular as any in the past few decades though, and freezing thresholds is a quieter way of increasing tax without causing outright uproar nationwide. But the impact of keeping these thresholds at the same levels should not be underestimated.
Why Freezing Bands Works So Well
Since the 1970s, the UK has had a principle often called the Rooker-Wise safeguard. This ensures that personal allowances should rise with inflation so governments cannot raise the tax by stealth. Parliament can override the safeguard, and during the Covid years did exactly that. At the time, the freeze was sold as temporary and necessary, but has since lingered because it raises so much extra tax for the government both quietly and reliably.
When inflation rises, prices increase, and wages stumble upwards, but tax thresholds don’t shift, a larger portion of every pound is paid in tax. People feel poorer – because they are in real-terms – despite no news of tax rates increasing. But the rates don’t need to increase. Because, as people’s earnings increase and bring more pounds into taxable bands, the income generated for the government is as inflated as if they’d changed tax allowances. Except, by not technically increasing rates, they haven’t had to announce anything, and they’re safe from public backlash. This is also known as fiscal drag.
Here’s the link to our previous report for further information.
Remember What Labour’s Manifesto Originally Promised?
- Core promise: “Labour will not increase taxes on working people”, defined in the manifesto as not increasing National Insurance, or the basic, higher, or additional rates of Income Tax or VAT
- How they said they’d raise money instead: targeted measures such as abolishing non-dom status, ending use of offshore trusts to avoid inheritance tax, tightening HMRC enforcement/anti-avoidance, putting VAT on private school fees, and closing the private equity “carried” interest loophole; plus a beefed-up windfall tax on oil and gas
- No broad new taxes listed: the manifesto didn’t propose any rate rises for the main taxes (Income Tax, NI, VAT) but instead relied on additional take from compliance measures
How Much It Will Cost You
With strong momentum behind the rumours of a 2p tax hike as well as maintaining the current brackets, here are the calculations of how much it costs people on different incomes. The example wages below are static and do not account for inflation, which also drags more people into higher tax brackets. Anyone on £20k today is unlikely to be at the same level in five years, meaning they would pay more tax than is shown here.
- £20,000 salary: £10,600 over five years in the current system becomes £11,720, which is £1,120 more.
- £30,000 salary: £23,536 becomes £25,751, which is £2,214 more.
- £40,000 salary: £36,473 becomes £39,781, which is £3,308 more.
- £50,000 salary: £53,064 becomes £58,226, which is £5,162 more.
- £60,000 salary: £78,883 becomes £85,139, which is £6,256 more.
Two things are clear: the freeze by itself pulls more income into tax as the years pass. The suggested tax increase multiplies that effect across every payslip in the country – the higher the salary, the faster the totals rise, but lower and middle earners will feel the drag earliest as small pay bumps push them over fixed lines.
Crisis Becomes Habit
When tax thresholds were originally frozen, it was described as an emergency measure. It survives today because it’s such a tidy cash generator for the Treasury and confusing enough for the public that it doesn’t get questioned enough. There’s no messy vote to raise a rate, and there’s no single moment that can be pointed to as the cause of a smaller pay packet. What began as crisis management has quickly become a habit, and it will remain one until the legislated indexation is restored in practice, as promised in the 1970s.
What to Watch in the Next Two Years
How long will the freeze(s) last? Each extra year is another unannounced rise that makes you poorer. Keep an eye out for “simplifications” as the government narrows allowances or widens the tax base, while avoiding all the language of a hike. Look for any later tweaks to bands being advertised as a giveaway to the public, when all it would really do is slow a burden we’re already locked into.
If there’s any commitment to honesty, the government can publish a multi-year path that lifts thresholds in line with earnings and shows where all the extra cash they generate goes. If that path doesn’t appear, assume that the plan is to let fiscal drag to the heavy lifting while insisting rates are stable – and that there is, in fact, no plan at all.
How You Can Prepare for Labour’s Tax Hike
Tax rises are not yet confirmed, and in theory it could all change at the Budget next month. If you want to get ahead, here are practical steps to soften the blow, and in some cases, return you to a lower band to reduce your tax burden.
- Check your position now: where do you sit relative to the current thresholds? If you’re near to a higher band and/or expecting a pay bump, small choices can make a big difference to you
- Consider salary sacrifice: Some employers let you swap part of your salary or bonus for a non-cash benefit, most commonly as extra pension contributions. This reduces taxable pay and lowers both Income Tax and National Insurance for you, as well as NI for your employer. This can help if you’re just over a threshold.
- Boost pension contributions: Paying more into a private or workplace pension can reduce taxable income and pull you back into a lower band. But remember that money in a pension is locked away until at least 55, rising to 57 from 2008
- Look into Marriage Allowance: if you’re married or in a civil partnership, and one partner has income below the personal allowance, up to £1,260 of their allowance can be transferred to the other partner. This can save a few hundred pounds a year.
- Plan ahead for bonuses and one-offs: if you can time a bonus or spread it over tax years, you may avoid tipping into higher bands during the impending freeze period
- Keep records: if the rules shift again in future, good paperwork makes it easier to claim reliefs you’re entitled to
Final Thought
You do not need a new tax to raise taxes. You need a freeze that never quite ends, and maybe a small increase in rates to boost state income. Governments always like to say the burden is shared, but workers know it’s concentrated on those who cannot move their income, costs, or assets. If growth is the goal, draining take-home pay through fiscal drag is the wrong first step. Index the bands, argue openly for any rise that is actually needed, and let voters decide on the strategy rather than lying in a manifesto and taking a U-turn at the earliest realistic opportunity.
Join the Conversation
The current Labour party has turned out to be one of the most unpopular governments in recent UK history, even among its own voters. Did you vote for them based on their promises? Did you avoid them in the election because you knew where they’d be heading? Following their victory, did it all seem a bit inevitable that they couldn’t follow through? Tell us your thoughts below.
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Categories: Breaking News, UK News
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