Market News

Households have been hit with an additional £12.41bn stealth tax raid on incomes, figures show.

According to HMRC data, frozen income tax thresholds helped the Treasury collect £154.18bn of revenue between April and September this year, up £12.41bn from £141.77bn in the same period last year.

Under the Tories, income tax thresholds were frozen until 2027-28, but Rachel Reeves is widely expected to extend the freeze until 2029-30 in her autumn Budget next month.

The Chancellor has limited the number of levers she can pull to fill a fiscal black hole of up to £50bn. She has committed not to increase the rates of income tax, National Insurance, VAT or corporation tax and has insisted she will not break Labour’s fiscal rules.

Extending the freeze on income tax and National Insurance thresholds would allow Ms Reeves to adhere to the letter of her pledge. According to an analysis by the Institute for Fiscal Studies, it would likely raise an extra £10.4bn a year in tax receipts.

However, the policy would cost a worker earning an average salary thousands more in income tax by the end of the decade.

According to estimates by HMRC, the threshold freeze forced an extra 520,000 taxpayers into the higher rate 40p tax bracket last year.

Rachael Griffin, of wealth management firm Quilter, said Pay As You Earn (PAYE) income tax and National Insurance contributions remain “artificially inflated” by the freeze to tax thresholds.

She added: “This doesn’t point to a roaring economy but a sign of a Treasury increasingly reliant on extracting more from the same taxpayers.

“With fiscal drag proving such a dependable source of income, the Chancellor may now be tempted to delay any unfreezing of thresholds, despite the political awkwardness that would bring.

“Reversing the freeze was positioned as a signature move in her first Budget, but maintaining it would quietly preserve billions in extra tax revenue.”

Ms Reeves is adamant that she will not break her fiscal rules – to increase public sector borrowing as a percentage of GDP or raise money on the markets to fund day-to-day spending – and believes that maintaining market stability should be the Government’s primary goal.

Previous chancellors have favoured balancing the books with a stealth income tax. Sir Jeremy Hunt introduced the current freeze to 2028 in his 2022 Budget.

However, the policy results in more people paying higher rates of income tax as their wages increase – an economic phenomenon known as fiscal drag.

Sarah Coles, of investment platform Hargreaves Lansdown, said: “The fact that this freeze is in place until 2028 means it’s not over yet. Speculation about possible income tax changes in the autumn Budget has grown over the past few weeks.

“There’s every chance the thresholds could be frozen for longer, as this stealth tax fits within the Government’s promise not to leave working people worse off, because it’s a tax on pay rises. At the same time, it’s clearly an incredible money-spinner.”

The Treasury was approached for comment.