Rachel Reeves is expected to extend a “stealth” freeze on income tax thresholds beyond the 2028 deadline set by the previous Conservative government to raise billions of pounds in the budget.
The chancellor is contemplating the move, first reported by the Financial Times, as she seeks tax-raising measures to plug a £40bn shortfall in the public finances that Labour claims was left by the Conservatives.
The chancellor is also understood to be targeting alternative measures amid Treasury concerns that Labour’s plans for a crackdown on non-doms is unlikely to bring in as much revenue as previously anticipated.
Freezing inheritance tax thresholds could bring in as much as £7bn a year after 2028, in the continuation of a policy first launched by Rishi Sunak during his time as chancellor, which was also extended by his successor, Jeremy Hunt.
The policy is known as “fiscal drag” because while it does not raise headline income tax rates, it drags workers into paying more tax as pay rises tip them into higher tax bands. The policy also deprives workers of an annual increase in their tax-free personal allowance, as it does not rise in line with inflation.
It drew immediate criticism from the Conservatives who said it could be seen as a breach of Labour’s manifesto not to raise taxes on “working people” by increasing income tax, national insurance or VAT.
Reeves is also believed to be looking at raising inheritance tax in the budget, as well as considering a rise to capital gains tax on shares, but not on the sale of second homes.
Asked about both income tax thresholds and inheritance tax on Friday in Germany, Keir Starmer declined to comment ahead of the budget.
Pressed on whether prolonging the freeze on the income tax thresholds would be a breach of the manifesto, Starmer said: “We are going to keep our manifesto pledges. I’ve made that very clear. I’m not going to pre-empt the individual measures that will be outlined by the chancellor in due course, but I’m equally clear – this is going to be a budget that will fix the foundations and rebuild our country.”
With billions to raise to fund the government’s plans, Reeves is examining changes to her fiscal rules that would redefine how debt is measured.
The Guardian understands the chancellor is also closing in on changes to the Treasury’s fiscal rules to unlock billions of pounds in additional borrowing headroom for investment in long-term infrastructure projects.
Whitehall sources said all options were “still in play” but that Reeves was prepared to makes changes to the rules.
