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Public finance

Rachel Reeves Faces Pressure to Freeze Income Tax Thresholds in Autumn Budget

Strategic Insights

— 2 min read

As the UK's Autumn Budget approaches, Rachel Reeves, the Chancellor, is under increasing pressure to find a solution to the £40 billion black hole. The latest policy reversal on benefit cuts has left the Treasury with limited options to raise funds, with some Labour MPs believing she may not survive the year if she is forced to raise taxes and impose further cuts. Freezing income tax thresholds, one of the suggestions made in a leaked memo from Angela Rayner, the Deputy Prime Minister, is now considered a likely option. This would raise around £10 billion in additional revenue by the end of the Parliament, according to Paul Johnson, the director of the Institute for Fiscal Studies.

Key Takeaways:

  • The UK Treasury is facing a £40 billion black hole due to lower-than-expected growth forecasts and the impact of Donald Trump's tariffs.
  • The £4 billion cost of Sir Keir Starmer's policy U-turns is expected to be compounded by a revision to the Office for Budget Responsibility's (OBR) medium-term productivity forecast and growth forecast.
  • Rachel Reeves, the Chancellor, has committed not to increase income tax, National Insurance, or VAT rates, nor to raise corporation tax.
  • Freezing the additional rate of income tax threshold would raise around £10 billion in additional revenue by the end of the Parliament.
  • The current freeze, due to be lifted in 2028, has already dragged seven million people into higher tax brackets, raising around £15 billion.
  • Paul Johnson, the director of the Institute for Fiscal Studies, considers a further freeze in thresholds "pretty high up the attractiveness scale" in this year's Budget.
  • The Treasury is already facing a black hole of between £20 billion and £30 billion due to lower-than-expected growth forecasts.

Statistics:

  • £40 billion: the size of the black hole the UK's Treasury is facing.
  • £4 billion: the cost of Sir Keir Starmer's policy U-turns.
  • £10 billion: the estimated revenue to be raised by freezing the additional rate of income tax threshold.
  • £15 billion: the revenue raised due to the current freeze in income tax thresholds.
  • Seven million: the number of people dragged into higher tax brackets due to the current freeze.
  • £20 billion - £30 billion: the size of the black hole the Treasury is already facing due to lower-than-expected growth forecasts.
  • 60%: the rise in the number of taxpayers in the 40p bracket due to the current freeze.
  • £15.3 billion: the extra revenue due to be raised thanks to the frozen thresholds in 2024-25, according to OBR figures.
  • £16.6 billion: the predicted increase in the total welfare bill in 2024-25, according to OBR figures.

Sources:

  • The Telegraph
  • Institute for Fiscal Studies
  • Office for Budget Responsibility (OBR)
  • HMRC
  • Treasury select committee

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