Chancellor Rachel Reeves has decided not to deviate from the Labour Party’s manifesto by raising income tax rates in the upcoming Budget, potentially avoiding backlash from Labour MPs and voters. Speculation suggests that this decision may have been influenced by a more positive economic outlook, with the Office for Budget Responsibility projecting a smaller deficit than previously anticipated.

One proposed strategy to boost Treasury revenue involves lowering the income tax thresholds for higher earners. Currently, individuals have a tax-free personal allowance of £12,570, followed by a basic rate of 20% for earnings between £12,571 and £50,270. The higher rate of 40% applies to income between £50,271 and £125,140, with a top rate of 45% for incomes exceeding that threshold.

According to the Resolution Foundation, reducing the higher rate threshold from £50,270 to £46,000 by 2029/30 could generate £9 billion in additional revenue. This approach, while sparing many low earners, would impact approximately 30% of the workforce, including numerous public sector employees.

Alternatively, experts at Pantheon Macroeconomics suggest that decreasing all income tax thresholds by 10% could yield £17 billion by 2028/29. However, such a move may face political challenges and deviate from the original manifesto.

While there are reports indicating that Rachel Reeves may not favor cutting income tax thresholds, there is speculation that she could extend the freeze on personal tax thresholds and National Insurance for an additional two years starting in April 2028. This measure, labeled a “stealth tax,” would gradually increase the tax burden on individuals as their incomes rise.

The Institute for Fiscal Studies warns that if the freeze continues, individuals earning the minimum wage may reach the income tax threshold by working just 18 hours per week by 2029/30. Additionally, more recipients of the new state pension could become liable for tax payments by 2027/28 if the freeze persists.

Matthew Oulton, a research economist at IFS, emphasizes the potential impact of extending the tax threshold freeze, stating that it would lead to a substantial revenue increase affecting a wide range of employees, including those on minimum wage and low-income pensioners. Adjusting tax thresholds is seen as a viable tool for the Chancellor to raise revenue and redistribute the tax burden effectively.