Workers earning £60,000 could find themselves paying an extra £643 if the Chancellor freezes tax thresholds – a so-called stealth tax – which is on the table along with a mansion tax.
She insisted to activists that she had been right to raise taxes and enforce fiscal discipline despite unrest from businesses unhappy with higher costs and from Labour supporters who want to see less of a focus on controlling borrowing.
In a series of interviews before her conference speech, the Chancellor insisted she would stick to the Labour manifesto promise not to raise the headline rates of income tax, national insurance or VAT.
Reeves sounded more open to other policies, including extending the current freeze on income tax thresholds which means that more and more workers and pensioners get dragged in to paying the basic and higher rates of the tax each year as their nominal income rises, even if it is only growing at the same rate as inflation.
Chief Secretary to the Prime Minister Darren Jones. Photo: Wiktor Szymanowicz/Future Publishing via Getty Images)
Darren Jones, who recently moved from the Treasury to become Keir Starmer’s chief secretary, also opened the door for Labour to break its election pledge. He told Sky News: “The manifesto stands today because decisions haven’t been taken yet. I’m not ruling anything out, and I’m not ruling anything in. Today, the manifesto stands.”
Stealth taxes such as the thresholds freeze have proved attractive to the Treasury in the past because they raise large amounts of revenue but are relatively hard for individual taxpayers to detect in their own finances.
Cost of the freeze
The rates at which people start paying the basic, higher and additional rates of tax were frozen under the previous Government in 2022, but the freeze is set to expire in 2028.
Someone on £60,000 would pay an extra £317 in 2028/29. Then, they would pay an extra £643 the following tax year.
The salary at which people start paying the basic rate of tax – at 20 per cent – as well as national insurance at 8 per cent, is £12,570.
All these tax thresholds typically increase alongside inflation, but have not done so for several years, and will not do so again until 2028 under current plans, or longer if Reeves opts for an extension.
If tax threshold were frozen until 2030, then many pensioners would be among those facing higher tax bills.
Many also receive the state pension, which is increasing each year by the highest of 2.5 per cent, inflation, or average earnings growth under the triple lock mechanism.
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Read MoreIf thresholds are frozen for longer, those relying on the state pension alone could face tax bills worth hundreds of pounds by the end of the decade.
Even it were to increase by the lowest possible amount – 2.5 per cent – in 2027, 2028 and 2029, it would hit £259.65 – or £13,501 by the end of the decade.
If average earnings or inflation is above 2.5 per cent in any of the next three years, then the tax bill for state pensioners will be higher than this.
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