UK Treasury Extends Income Tax Threshold Freeze to Raise £7 Billion Annually

The UK Treasury plans to prolong the income tax threshold freeze beyond 2028, a MOVE expected to generate £7 billion yearly. Initially implemented in 2021 by the Conservatives, the freeze prevents tax bands from adjusting to inflation, effectively pulling more earners into higher brackets as wages rise—a phenomenon known as fiscal drag.

Chancellor Rachel Reeves faces mounting fiscal pressure, with analysts warning of a potential £50 billion deficit. Extending the freeze emerges as a key option, circumventing Labour's campaign pledge against raising income tax rates, National Insurance, or VAT. The Office for Budget Responsibility projects this mechanism could yield £51 billion annually by 2030.

Reeves previously criticized the policy for harming working families but now confronts tighter fiscal constraints. Elevated borrowing costs have eroded financial buffers, compelling adherence to strict spending rules. The decision underscores the tension between revenue generation and economic equity in a stagnant fiscal landscape.