Extending a freeze on income tax thresholds in the budget would not break Labour’s election manifesto, government sources have suggested.
The current freeze in thresholds, brought in by the previous Conservative government after the pandemic, is due to expire in 2028.
However, Chancellor Rachel Reeves is now expected to prolong this for another two years to 2030.
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It means thresholds would not start rising with inflation once again, resulting in hundreds of thousands of people being dragged into higher tax bands.
Government sources have pointed to the “language” of the June manifesto, in which the party pledged not to increase “the basic, higher, or additional rates of income tax”.
This suggests the chancellor believes a move to extend the thresholds would not constitute a breach of Labour’s election commitments as the 20p, 40p and 45p rates would remain unchanged.
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The thinktank the Institute for Fiscal Studies said extending the freeze would pull 400,000 more people into paying income tax while another 600,000 people would be dragged into the higher and additional rates.
The Financial Times, which first reported the story, suggested the measure could bring in £7bn a year.
This happens through a process known as “fiscal drag” where people are pulled into higher tax rates as their pay and salaries rise over time.
Labour previously called the measure a “stealth tax on working people” when it was announced by Rishi Sunak in 2022.
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The Conservatives had promised not to increase income tax rates in the 2019 election and justified the change by pointing to the huge debts run up during the pandemic.
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The current chancellor is trying to find £40bn through tax rises and spending cuts and is expected to announce a raft of measures in the budget on 30 October.
Last weekend the business secretary, Jonathan Reynolds, suggested to Sky News a hike to employer’s national insurance would not contravene his party’s manifesto – again pointing to the specific wording of Labour’s election pledges.
There have also been reports that fuel duty, inheritance tax and capital gains tax could all be altered.
