The Fabian Society, a key Labour thinktank, is recommending that Rachel Reeves raise £12 billion in the upcoming budget by extending the freeze on income tax thresholds for an additional two years. Joe Dromey, the general secretary of the Fabians, claims this approach is a viable option for Reeves as she navigates weaker economic forecasts in her budget statement scheduled for November 26.
Reeves is tasked with identifying between £10 billion and £30 billion in annual tax increases or spending cuts to adhere to her fiscal rules, following updated growth projections from the Office for Budget Responsibility (OBR). Dromey argues that continuing the freeze would raise over half the necessary funding with minimal political risk, mainly affecting wealthier households. Since 2022, when Rishi Sunak initiated the income tax threshold freeze, it has remained unchanged annually, rather than increasing in line with inflation.
Chancellor Jeremy Hunt extended this freeze, which is projected to yield an extra £45 billion annually by the time it ends in 2027-28. However, extending the freeze may be contentious, as the number of individuals subject to the 40% higher rate of income tax, starting at £50,271, is expected to rise significantly.
While Dromey acknowledges potential criticisms, including concerns from opposition parties regarding the impact on working individuals, he maintains that it remains a progressive choice. He notes that almost half of the potential revenue would come from the highest-earning fifth of households, contrasting with only 4% from the lowest-income households.
The Fabian Society’s report, “Taxing Questions,” offers various options for Reeves that would not require breaking her manifesto pledge regarding income tax rates. Treasury select committee chair Meg Hillier cautions against relying on untested tax proposals, while fellow committee member Liam Byrne advocates for a heavier tax on wealth to address inequality. This includes reforms to inheritance tax and property-related taxes, highlighting the broader discussion on taxation in addressing fiscal challenges.
Source: https://www.theguardian.com/uk-news/2025/oct/25/raise-12bn-in-budget-by-extending-income-tax-thresholds-freeze-says-thinktank