Rachel Reeves is preparing to raise £7.5bn by freezing income tax thresholds for two years, reversing earlier expectations that she would increase income tax rates. The chancellor abandoned plans for a rate rise after concerns that breaking the manifesto pledge could erode public trust and destabilise the government’s standing.
The freeze means millions of workers will pay more due to rising wages and inflation pushing them into higher tax bands. Economists describe this as a “stealth tax,” generating significant revenue without formally changing tax rates.
The decision followed a volatile week in the markets. Investors reacted negatively to early signals that Reeves would pursue aggressive tax changes, sending government borrowing costs up and weakening the pound. Treasury sources say the threshold freeze is intended to provide fiscal stability while avoiding deeper market shocks.
Reeves had been considering raising income tax by up to 2p but changed course after updated forecasts suggested the fiscal gap was closer to £20bn, not £30bn. This allowed her to opt for a less confrontational approach. However, markets remain cautious, worried that smaller measures may not fully address long-term financial pressures.
Additional tax proposals include ending pension salary-sacrifice benefits and introducing a levy on electric vehicles. Yet analysts warn these steps fall far short of the £20bn hole, leaving Reeves under pressure to show a credible plan in her upcoming budget.