Chancellor Rachel Reeves is reportedly considering changes to income tax policy, as the government struggles to navigate increasing fiscal pressures. While no official decision has been announced, discussions within the Treasury suggest that one of the measures under review is freezing income tax thresholds—a strategy that could push more earners into higher tax bands over time.
This move comes as the government’s ability to maintain its fiscal commitments has become more difficult due to weaker-than-expected economic growth and rising interest rates. Although Reeves has previously stated that she would not return with additional tax increases, she is now said to be keeping all options open as she works to balance the books.
Economic Pressures and the Risk of ‘Stealth Taxes’
The UK economy narrowly avoided a technical recession, growing by just 0.1% in the final quarter of last year. However, this modest growth has failed to provide the government with the financial flexibility it had hoped for. With borrowing costs rising and economic stagnation persisting, maintaining fiscal discipline is becoming increasingly complex.
One of the measures being widely discussed is the freezing of income tax thresholds, which has been described as a ‘stealth tax’ because it gradually increases the tax burden on workers without officially raising tax rates. By keeping tax bands at current levels while wages rise with inflation, more people would find themselves pushed into higher tax brackets, boosting government revenues without an explicit tax hike.
According to a report from the Financial Times, such a move could raise as much as £4 billion per year, helping to close the government’s growing fiscal gap. However, critics argue that this approach places a greater tax burden on middle-income earners and could weaken consumer spending power at a time when many households are still struggling with the cost of living.
A Shrinking Fiscal Buffer and Tough Decisions Ahead
The government initially had £9.9 billion in fiscal headroom, but this cushion has effectively been wiped out by poor growth figures and rising interest payments on government debt. This means the Chancellor faces difficult choices ahead, as she attempts to ensure that public debt continues to decline as a proportion of GDP, a key fiscal rule that Reeves has called “non-negotiable”.
With limited room for manoeuvre, tax adjustments and spending cuts are both being considered as possible solutions. While Reeves has so far avoided committing to any specific tax changes, the upcoming Office for Budget Responsibility (OBR) report, set to be released on 26 March, is expected to provide a clearer picture of the government’s financial position. Reeves is set to respond to the report on the same day, which could include announcements on tax and spending policies.
Treasury’s Position and Next Steps
When asked whether tax changes were being planned for next month, the Treasury did not rule out the possibility. Instead, it reiterated the government’s commitment to sound public finances and to sticking to its fiscal rules, which aim to ensure long-term economic stability. The government has also maintained that it will only hold one major fiscal event per year, suggesting that any policy changes in March may be framed as adjustments rather than a full-scale budget revision.
With fiscal pressures mounting and options narrowing, all eyes will be on Rachel Reeves’ statement next month, where she will have to outline how the government plans to manage its finances while keeping taxpayers, businesses, and markets onside.
