UK (Parliament Politics Magazine) – Chancellor Rachel Reeves faces calls from the Fabian Society to raise £12bn by extending the income tax threshold freeze amid weak growth.
As reported by The Guardian, Labour thinktank Fabian Society urges Rachel Reeves to raise £12bn by keeping income tax thresholds frozen for two years.
What did the Fabian Society say about extending the income tax threshold freeze to raise £12bn?
Joe Dromey, Fabian Society general secretary, argued that freezing income tax thresholds is the “best available option” for Rachel Reeves to offset weaker growth forecasts.
Following slowing growth expectations from the Office for Budget Responsibility, Reeves faces the challenge of finding £10bn–£30bn through taxes or spending to meet fiscal rules.
Mr Dromey described the income tax threshold freeze as “an effective and progressive way to raise over half the funding needed, mostly from wealthier households, with relatively little political risk.”
He admits the policy carries risks, as critics may recall Ms Reeves’s stance that it would
“hurt working people and take more money out of their payslips.”
Mr Dromey insists the policy would be the fairer, more progressive option, saying,
“The chancellor recently said she wanted to ensure that those with the ‘broadest shoulders pay their fair share of tax’. Our modelling suggests that half (49%) of the revenue raised would come from the highest-earning fifth of households. Conversely, the poorest fifth of households would bear just 4% of the cost.”
He added,
“With our public services in dire need of investment, and our public finances under great pressure, there are few good options. Continuing the freeze in income tax thresholds for a further two years is surely one of the better ones.”
The Fabian pamphlet, Taxing Questions, proposed extending the freeze, allowing Ms Reeves to meet fiscal targets without breaking her manifesto pledge on income tax rates.
As chancellor, Jeremy Hunt extended the pause on income tax thresholds, but it is due to end in 2027/28, with the OBR projecting £45bn extra revenue per year.
Extending the freeze may raise political concern, as a growing number of earners will face the 40% income tax rate at £50,271.
How did Meg Hillier warn Rachel Reeves about untested tax proposals?
Meg Hillier, chair of the Treasury select committee, cautions Reeves in the report’s foreword against using unproven taxes to raise funds.
She added,
“Ideas such as a wealth tax, changes to property tax, and even business rate reform are not easy or quick to deliver and not proven to work.”
What did Liam Byrne propose about taxing wealth and property to tackle inequality?
In the report, Labour MP Liam Byrne, chair of the Business and Trade Committee, calls for heavier taxation on wealth and property to address inequality.
He proposes reforms, including changes to inheritance tax, taxing individuals based on lifetime income rather than the estate’s value.
Mr Byrne suggests replacing council tax and stamp duty with an annual levy on property values, along with a windfall tax on banks.
He added,
“We will not defeat populism without higher levies on wealth. We will not rebuild Britain without restoring fairness to Britain’s taxes. And we will not restore faith in politics until people see that the rules of the game apply to everyone, from the factory floor to the boardroom and beyond.”
What did Rachel Reeves say about tax rises and spending cuts in her upcoming budget?
Rachel Reeves indicated that the budget may include tax increases and spending cuts to address the fiscal gap, saying,
“Of course, we’re looking at tax and spending as well.”
When asked about the economy being in a “doom loop” of annual tax increases, Ms Reeves seemed to concede the point.
She stressed her focus on boosting the economy and, when asked a third time, declined to call it a “doom loop,” noting the UK’s strong growth in the G7.
Ms Reeves said, “I was really clear during the general election campaign – and we discussed this many times – that I would always make sure the numbers add up. Challenges are being thrown our way – whether that is the geopolitical uncertainties, the conflicts around the world, the increased tariffs and barriers to trade. And now this (OBR) review is looking at how productive our economy has been in the past and then projecting that forward.”
The chancellor added,
“Of course, we’re looking at tax and spending as well, but the numbers will always add up with me as chancellor because we saw just three years ago what happens when a government, where the Conservatives, lost control of the public finances: inflation and interest rates went through the roof.”
Ms Reeves said,
“Austerity, Brexit, and the ongoing impact of Liz Truss’s mini-budget, all of those things have weighed heavily on the UK economy. Already, people thought that the UK economy would be 4% smaller because of Brexit,” adding, “Now, of course, we are undoing some of that damage by the deal that we did with the EU earlier this year on food and farming, goods moving between us and the continent, on energy and electricity trading, on an ambitious youth mobility scheme, but there is no doubting that the impact of Brexit is severe and long-lasting.”
Key changes in the UK Budget 2025
The government may target pension tax relief, particularly the 25% tax-free lump sum allowance, or reduce tax relief on contributions for higher earners.
The Budget may see changes in property and investment income, including potentially applying National Insurance to rental income and increasing Capital Gains Tax rates.