A drastic plan to hike Income Tax and National Insurance could see millions of people paying more tax according to plans rumoured to be being considered by Rachel Reeves for this Wednesday’s Budget.
Budget speculation has been long and intense, with all sorts of plans from EV driver taxes to Inheritance Tax changes and a Cash ISA cut all heavily rumoured to feature.
But one new plan is being floated just days away from the big reveal, which would amount to a manifesto-breaking hike to both Income Tax and National Insurance.
It is thought that Rachel Reeves is set to extend the freeze on Income Tax thresholds, first introduced by the Conservatives in 2021. At the time, it was announced that the thresholds would be frozen until at least 2028, but now the Chancellor is looking at extending the freeze again.
This is an effective tax increase on National Insurance and 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.