Labour’s new ‘£9bn’ stealth tax raid? Hated freeze on thresholds set to hammer Brits even harder as inflation surges – in Budget windfall for Chancellor
Workers will pay significantly more income tax over coming years despite wages not keeping pace with inflation, as the government's freeze on tax thresholds pushes people into higher brackets. The Institute for Fiscal Studies estimates this "stealth tax" effect will generate around £9 billion in additional annual income tax revenue by 2029-30, helping the Chancellor offset fiscal pressures and meet the government's fiscal rules amid rising debt costs.
The threshold freeze, originally introduced by the Conservatives in 2022 and extended twice since, already raises more than £50 billion annually by the end of the decade. However, the IFS has warned the government cannot simply pocket this windfall, as inflation will simultaneously strain departmental spending severely. The think-tank calculates that avoiding real-terms cuts to public services would require £24 billion, whilst meeting the 3 per cent defence spending target would need a further £11 billion by 2030-31.
- Threshold freeze will generate £9bn extra tax annually by 2029-30 as inflation rises.
- The windfall offsets fiscal pressures but masks the need for service cuts or new taxes.
- Chancellor faces difficult choices on defence spending and departmental budgets with limited fiscal room.
New here? Start with this
Income tax thresholds are the salary levels at which workers begin paying tax or move into a higher tax bracket. The government has frozen these thresholds, meaning they do not rise with inflation – so as wages increase with the cost of living, more of that income becomes taxable at higher rates. This affects millions of workers who will pay more income tax even though their wages are not keeping pace with inflation.
The threshold freeze was introduced by the previous Conservative government in 2022 and has been extended since. The Institute for Fiscal Studies, an independent think-tank, calculates that it will raise around £9 billion in additional income tax each year by 2029-30, helping the government offset financial pressures. This extra revenue is why the government has continued and extended the freeze.
However, the IFS points out that the government faces a larger problem: inflation is making public services far more expensive to run. Alongside its commitment to increase defence spending, the government would need to find tens of billions of pounds beyond the threshold freeze revenue just to maintain current service levels. This means the extra tax money helps but does not solve the underlying financial squeeze.
Both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Faced with genuine fiscal pressures from debt servicing costs and major spending commitments, the threshold freeze represents a measured revenue measure that avoids worse alternatives like explicit tax rate rises, which are more economically distortive, or significant service cuts. The policy is transparent, applies equally to all workers, and functions as an automatic adjustment to inflation rather than a deliberate targeted tax increase. In difficult fiscal circumstances, this approach balances necessary revenue generation with relatively proportionate and economically sound impact.
The case against
The threshold freeze functions as a stealth income tax rise that erodes living standards precisely when inflation strains household finances and real wages stagnate—workers experience their tax bills rising despite flat earnings, making it regressive and inequality-worsening. Labour's continuation of this Conservative policy contradicts campaign promises to support working people, effectively prioritising fiscal targets over household living standards. Rather than letting bracket creep silently shift the burden to struggling workers, the government should address fiscal pressures through economic growth, tax compliance enforcement, and explicit policy choices.