Reeves Extends Tax Threshold Freeze in £8bn Stealth Tax Move Amid Poverty Claims
When Rachel Reeves stood before the House of Commons on Wednesday, 26 November 2025, she didn’t raise tax rates. She did something quieter—and far more pervasive. By extending the freeze on income tax thresholds through to 2031, the Rachel Reeves, Chancellor of the Exchequer, unlocked £8 billion in extra revenue by 2029-30, not through bold new levies, but by letting inflation do the work. The move, widely labeled a "stealth tax" by financial expert Martin Lewis, means millions of workers will pay more without ever seeing a rate change on their payslip. And it’s just one piece of a £26 billion tax hike package designed to plug a fiscal hole left by the previous government.
How the Freeze Works—and Why It Hurts
The income tax threshold, which determines when you start paying 20% tax, has been frozen since 2021. Originally set to rise again in April 2028, Reeves has now locked it in until 2031. With inflation and wage growth pushing salaries higher, more people are being pulled into higher tax bands. The Office for Budget Responsibility (OBR) estimates 1.7 million workers will be dragged into the 40% bracket by 2031. Another 780,000 will pay income tax for the first time. That’s nearly one in four workers affected.
It’s not just about income tax. The personal allowance—the amount you earn before paying any tax at all—remains stuck at £12,570. A worker earning £30,000 today will, by 2031, be earning £35,000 in real terms. But because the thresholds haven’t moved, they’ll pay £215 more in tax than if the threshold had kept pace with inflation. "It’s not a tax rise on paper," said one Manchester resident interviewed by Sky News. "But it’s a tax rise on my pocket. And I’m not even middle class."
"We Didn’t Break the Manifesto"
Labour’s 2024 election manifesto promised no increases to income tax, national insurance, or VAT rates. Reeves didn’t break that promise—technically. But as Baroness Harriet Harman, Deputy Leader of the Labour Party, admitted to political correspondent Faisal Islam, "she has had to increase the tax take, and she’s done it by freezing the thresholds, which she didn’t want to do."
Harman defended the move as the "fairest possible way," arguing that the government is offsetting the pain with targeted support. The budget includes £1.5 billion for child poverty reduction, with the Treasury projecting 450,000 children will be lifted out of poverty by 2028. "This isn’t about punishing hard workers," Harman said. "It’s about protecting the most vulnerable by funding schools, childcare, and job programs."
But fairness is subjective. In Greater Manchester, one homeowner noted they’re paying £250 more annually in stamp duty because their property is valued over £2 million. "Something’s horrendously wrong," they said. Meanwhile, low-income families are being hit by rising energy bills—until, that is, Reeves’ team made a last-minute change.
Three Wins for Households—And One Big Mistake
On the same day Reeves announced the tax freeze, Martin Lewis revealed three wins secured after private talks with Treasury officials. The biggest: removing the green levies from energy bills. That cuts the average household’s annual energy costs by £150. The unit rate for electricity drops by 3.4p per kWh, gas by 0.3p. The government is moving those costs into general taxation instead.
"That’s real money," Lewis said. "It’s the difference between heating your home and choosing between food and warmth."
But there was a blunder. The OBR accidentally published its full economic forecast 47 minutes before Reeves spoke. "Staggering fat fingers," Lewis called it. "The government will be fuming. The market reacted before the message was even delivered."
Who’s Really Paying?
The Treasury insists the burden is shared. The top 1% now pay 28% of all income tax, up from 25% in 2020. The top 10% pay 55%. But the freeze hits middle earners hardest. A teacher earning £38,000 in London, a nurse in Birmingham on £34,000, a delivery driver in Leeds on £32,000—none of them are rich. Yet all will pay more simply because their pay rose with inflation.
"We’re not talking about millionaires," said Dr. Eleanor Voss, an economist at the Institute for Fiscal Studies. "We’re talking about people who got a 3% raise last year and now owe £180 more in tax. That’s not a policy—it’s a passive tax grab."
What Happens Next?
The Finance Bill 2025 to 2026 will now move through Parliament. Public consultation ends in January. The government will publish its Overview of Tax Legislation and Rates (OOTLAR) next week, detailing every change. But the real test isn’t in the documents—it’s on the doorstep.
Reeves and her team know they’ve created a political time bomb. "The woman on the doorstep," as Harman put it, won’t care about manifesto pledges or OBR projections. She’ll care about her bank balance. And if she sees her pay rise, but her take-home pay doesn’t, the backlash won’t be quiet.
Why This Matters Beyond the Numbers
This isn’t just about tax. It’s about trust. After a decade of austerity, wage stagnation, and cost-of-living crises, many voters expected Labour to be the party that finally lifted the squeeze. Instead, they’ve deepened it—just more quietly. The £8 billion raised won’t just fund childcare. It’ll also pay for the NHS, the police, and the crumbling rail network. But if people feel betrayed, even well-intentioned spending won’t win them back.
Frequently Asked Questions
How does the income tax threshold freeze affect my take-home pay?
If you earn between £25,000 and £50,000, you’ll pay more tax by 2031 even if your salary doesn’t change in real terms. For example, someone earning £32,000 today will pay £215 more annually by 2031 because inflation pushes them into higher tax bands. The threshold remains frozen at £12,570, so more of your income becomes taxable. Around 1.7 million workers will be dragged into the 40% bracket, and 780,000 will pay income tax for the first time.
Why didn’t Labour just raise tax rates like they promised not to?
Labour’s 2024 manifesto explicitly ruled out increasing income tax, national insurance, or VAT rates. Rachel Reeves avoided breaking that promise by freezing thresholds instead. It’s a legal loophole: the rate stays the same, but more income becomes taxable due to inflation. Baroness Harriet Harman confirmed this was a deliberate strategy to stay within manifesto bounds while still raising revenue—though critics argue it’s a semantic trick that hurts the same people.
How will lifting 450,000 children out of poverty offset these tax increases?
The government plans to spend £1.5 billion on childcare, free school meals, and job support for parents. By reducing child poverty, they expect to cut long-term costs in welfare, healthcare, and education. A child raised out of poverty is less likely to need emergency services later. But this doesn’t help families now. Many parents facing £200+ extra in taxes won’t see the benefits until their children are older, creating a painful gap between policy and lived experience.
Is the £150 energy bill cut really a win?
Yes—but it’s offset. Removing green levies from energy bills saves households £150 a year, thanks to a 3.4p drop in electricity and 0.3p in gas per kWh. But those costs are being shifted to general taxation, meaning everyone pays a little more through income or council tax. Low-income households benefit more from the energy cut, while middle earners lose more in income tax. It’s a trade-off, not a free lunch.
What’s the risk if the public rejects this budget?
Labour’s electoral mandate was built on restoring trust and fairness. If voters perceive this as a betrayal—raising taxes without raising rates—they may turn away before the next election. Polls already show 58% of middle-income earners believe the freeze is unfair. Without a strong public education campaign, the government risks alienating the very voters who helped it win power in 2024.
When will we know if this policy works?
The Office for Budget Responsibility will publish its next forecast in March 2026, showing how tax receipts have changed. By late 2027, we’ll see whether child poverty has dropped as projected. But the real test is political: if public dissatisfaction grows before 2028, the freeze may be reversed—or become a defining failure of Reeves’ chancellorship.
