Rachel Reeves and Keir Starmer’s chief secretary have given the strongest hint yet that manifesto commitments not to raise taxes on working people could be broken in November’s budget – with average workers facing a £214 hike.
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.
Speaking at the Labour conference in Liverpool, the Chancellor warned of “further tests” facing the party in the coming months – a reference to the Budget taking place in late November.
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.
Reeves added: “In the months ahead, we will face further tests, with the choices to come made all the harder by harsh global headwinds and the long-term damage done to our economy, which is becoming ever clearer.”
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.
She also ruled out a wealth tax, a key demand of many left-wing MPs and union leaders – telling Bloomberg TV: “We already have taxes on wealthy people, I don’t think we need a standalone wealth tax. I’m not even sure it would work.”
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.
Asked by BBC Breakfast to rule out an extension of the freeze, which is due to expire in 2028 when thresholds will again rise in line with inflation, the Chancellor said: “I’m not going to be able to do that. We are at risk of writing a Budget live on air.”
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.”
Reeves also appeared to defend the concept of a “mansion tax” which would be applied to sales of properties worth more than £1.5m. Asked by The Times if such a policy would be unfair to people living in relatively modest homes in expensive areas, she replied that she cared more about “the family who bought a home three, five years ago and got an interest rate of 2 per cent, 3 per cent… when they came to renew, we were on 6 per cent”.
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
An extension to the stealth tax on workers’ incomes could end up costing an average earner over £200 a year by the end of the decade, while higher earners could face an even bigger hit.
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 earning £30,000 could end up paying an extra £106 in income tax and national insurance in 2028/29 and an extra £214 in 2029/30 if the threshold freeze were to be extended by Reeves and wages rose in line with inflation, calculations from wealth manager Quilter show.
Someone on £60,000 would pay an extra £317 in 2028/29. Then, they would pay an extra £643 the following tax year.
An even higher earner, on £150,000, would pay an extra £354 in 2028/29. They would also pay an extra £718 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.
The higher rate of tax, which applies to £50,271 to £125,140, is 40 per cent. The top rate of tax, which applies to over £125,140, is currently 45 per cent. National insurance drops to 2 per cent above a £50,270 salary.
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.
Quilter’s calculations work on the basis of inflation averaging 3 per cent over the next five years, and the worker getting 5 per cent annual pay increases.
If tax threshold were frozen until 2030, then many pensioners would be among those facing higher tax bills.
Those aged 66 or higher do not pay NI, but they do pay income tax at the same rates as other employees.
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.
It is set to go above the personal allowance threshold in 2027, meaning pensioners whose only income is the state pension will pay tax on their income.
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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.
From 2026, the full new state pension will rise to £241.05 per week, equating to £12,534.60 over a year.
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.
This would lead to a tax bill of £186 per year.
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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