Chancellor Rachel Reeves is facing mounting criticism after admitting she may extend the freeze on income tax thresholds a move that could see 170,000 Londoners pay hundreds more in tax each year by the end of the decade.
Research commissioned by the Liberal Democrats warns that tens of thousands of people will be dragged into the tax system for the first time or pushed into higher brackets if Reeves continues the Conservative-era policy. Critics argue the measure represents a “stealth tax” that risks breaking Labour’s election pledge not to raise taxes on working families.
Impact on London Workers
According to the figures, around 60,000 low-income earners in London, currently below the £12,570 threshold, would be brought into the 20p basic rate of income tax by 2029/30.
Meanwhile, higher-rate taxpayers could face losses averaging £350 annually if the freeze is extended, with more than 100,000 workers pushed into the 40p tax band.
Lib Dems Demand a Rethink
The Liberal Democrats have urged Reeves to rule out the policy before her Autumn Budget on November 26. Bobby Dean, Lib Dem MP for Carshalton and Wallington, described the measure as “catastrophic,” warning it would hit families already struggling with high housing and living costs.
“Extending stealth taxes would be catastrophic for working families across the capital, and a move straight from the Conservatives’ playbook. This is certainly not the change Londoners were promised,” Dean said.
History of the Threshold Freeze
The freeze was first introduced in 2021 by then-Chancellor Rishi Sunak, locking the personal allowance and higher rate thresholds until 2026. His successor Jeremy Hunt later extended the freeze until 2028.
In her 2024 Budget, Reeves pledged the freeze would end by 2028–29, arguing that prolonging it would “hurt working people.” However, in recent months she has avoided repeating the promise, fuelling speculation that she may extend the measure further.
Labour Faces Growing Pressure
Reeves has spent much of the Labour Party Conference fielding questions about potential tax rises as she seeks to fill a reported £30bn gap in public finances.
Speaking to the BBC, she acknowledged the challenges: “The world has changed, and we’re not immune to that change,” citing wars in Europe and the Middle East, rising US tariffs, and the global cost of borrowing as pressures weighing on the UK economy.
VAT Speculation Off the Table
Despite ruling out a VAT hike, Reeves has left the door open on income tax thresholds. She has dismissed rumours over Budget details as “irresponsible,” accusing commentators of spreading misinformation that prompted irreversible financial decisions last year.
Her comments, however, have only heightened speculation that the freeze will be extended, given limited fiscal options available to raise revenue without directly breaching Labour’s manifesto pledges.
Wider Implications for Families
Analysts warn the policy would effectively increase the tax burden without altering rates, as wage inflation pushes more workers into higher brackets. This fiscal drag could deliver billions for the Treasury, but at the cost of households’ disposable income.
With Londoners among the hardest hit owing to higher wages and living costs, campaigners argue the freeze risks undermining trust in the government’s economic promises.
Final Summary
Rachel Reeves’ reluctance to rule out extending the income tax threshold freeze has sparked warnings of a “stealth tax raid” on Londoners. Up to 170,000 residents could be pulled into higher tax bands, losing hundreds of pounds annually by 2030.
While Reeves insists speculation around her November Budget is premature, her refusal to restate earlier promises has left many fearing the worst. As Labour balances manifesto pledges with a £30bn funding shortfall, the debate over tax fairness and fiscal responsibility is set to dominate the weeks ahead.
For workers caught in the middle of fiscal drag, Pie the UK’s first personal tax app helps track real-time tax figures, simplify self-assessment, and plan ahead for changing thresholds.
