Chancellor Rachel Reeves is poised to announce a significant shift in her tax strategy during the upcoming budget, opting to extend a freeze on income tax thresholds for an additional two years. This move comes after she publicly scrapped controversial plans to directly increase income tax rates.
Budget U-Turn and the New Tax Strategy
The Chancellor had previously signalled that raising income tax was a serious possibility, warning just days ago that the alternative would be "deep cuts" to public investment. However, this approach was abandoned as it would have broken a key Labour manifesto pledge. The reversal is understood to follow improved economic forecasts from the Office for Budget Responsibility.
Instead of a single large tax hike, the Treasury is now preparing a "smorgasbord" of smaller revenue-raising measures. Alongside the extended threshold freeze, the government is considering restrictions on salary sacrifice schemes and new levies targeting electric vehicle owners.
The Impact of Fiscal Drag on Taxpayers
The central pillar of this new approach is the decision to freeze income tax thresholds for an extra two years, until 2030. This policy is projected to generate approximately £8 billion annually for the Treasury through a mechanism known as fiscal drag.
Currently, the personal allowance threshold of £12,570 is the point at which individuals start paying the 20% basic rate of income tax. This level has been frozen since 2021. As wages increase with inflation, but the threshold remains static, more people are pulled into the tax system or into higher tax brackets. This disproportionately affects lower earners.
There are growing concerns that the combination of the frozen threshold and the state pension triple lock could soon force pensioners to pay income tax. The state pension is expected to rise by 4.8% in April 2026, pushing the annual amount for the full new State Pension to around £12,548—just £22 below the current tax-free personal allowance.
New Property Levy and Market Reaction
Further measures are expected to target wealthier households. Reports indicate that Chancellor Reeves may introduce a new levy on high-value properties, primarily affecting homes in London and the South East.
This plan would involve revaluing 2.4 million of the most expensive properties across council tax bands F, G and H. A separate surcharge would then be applied to the top 300,000 of these properties, adding to their existing council tax bills.
The Chancellor's change of direction initially triggered a sell-off in government bonds (gilts), increasing borrowing costs, though the market later stabilised. Helen Miller, director of the Institute for Fiscal Studies, commented that while last-minute budget changes are "not unusual", the shift could worry investors.
"They may also worry that the change of plans signals that this Government are reluctant to do politically difficult things," Miller stated, adding that such concerns can lead investors to demand higher returns when lending to the Government.
A Treasury spokesperson declined to comment on the speculation, stating: "We do not comment on speculation around changes to tax outside of fiscal events." The official budget announcement is scheduled for November 26.
