Introduction
The Labour government is facing mounting criticism ahead of the 26 November budget as it prepares to maintain the Conservative-imposed freeze on income tax thresholds.
The move labelled a “stealth tax” by analysts could raise around £8 billion, but would see millions of workers pushed into higher tax brackets despite stagnant living standards.
Chancellor Rachel Reeves has already backed away from raising income tax rates, which would have broken a manifesto pledge. Instead, Labour is leaning on its strict self-imposed fiscal rules while rejecting calls to raise taxes on the wealthy or big business.
Why Labour Is Sticking to the Threshold Freeze
The government previously claimed it was dealing with a £30–£40 billion “black hole”, but revised estimates from the Office for Budget Responsibility (OBR) say the figure is closer to £20 billion.
Despite the improved outlook, Labour insists it must meet fiscal rules requiring government debt to fall as a share of national income by 2029–30. Critics say these rules are designed to reassure financial markets rather than protect working-class living standards.
Ministers continue briefing the media that “tough choices” are unavoidable choices that could mean higher tax bills for millions.
How Income Tax Thresholds Work
Under current rules:
- £12,570: personal allowance (tax-free)
- £12,571–£50,270: 20% basic rate
- £50,271–£125,140: 40% higher rate
- £125,140+: 45% additional rate
Traditionally, thresholds rise with inflation to prevent workers being pushed into higher bands unfairly. But the previous Conservative government froze them, increasing tax revenue as wages rise due to inflation.
Labour now plans to extend this freeze beyond 2028, continuing the pressure on working households.
The Freeze: A Stealth Tax on Millions
The Institute for Fiscal Studies (IFS) says keeping the freeze is “roughly equivalent to increasing income tax by 3.5 percentage points.”
IFS economist Matthew Oulton states the freeze will increase tax burdens on:
- Full-time workers
- Most part-time workers
- Minimum wage earners
- Many low-income pensioners
The impact comes as inflation continues to erode real income, leaving households paying more tax despite feeling poorer.
Impact on Pensioners
After the removal of the winter fuel allowance, pensioners are bracing for further financial strain. Analysts warn Labour may explore additional pension-related tax changes as part of its budget strategy.
Political Fallout Inside Labour
The tax U-turn has intensified internal pressure on Keir Starmer. Leaked Downing Street briefing documents intended to project confidence sparked speculation about leadership challengers instead.
Names floated include:
- Wes Streeting
- John Healey
- Shabana Mahmood
- Recently removed deputy leader Angela Rayner
Polling shows half of those who voted Labour in the general election have since abandoned the party, signalling a rising crisis for the government.
Final Summary
Labour is set to keep the Tory freeze on income tax thresholds, raising £8 billion by pushing millions of workers and pensioners into higher tax bands despite falling living standards. Critics say the policy acts as a “stealth tax” and hits the lowest earners hardest.
Labour insists it must follow strict fiscal rules, but internal tensions are rising and polling shows support collapsing as the government refuses to consider taxing the wealthy instead.
For citizens and businesses seeking clarity on tax changes and budget implications, the Pie app provides timely information and resources to help navigate policy developments.
