All week we’ve been hearing reports that Chancellor Rachel Reeves was set to hike income tax in the forthcoming budget, despite manifesto pledges not to do so, in an attempt to try and balance the Treasury’s books. Today, it seems that any plans to increase to income tax have now been dropped following new reports from the OBR about the size of the fiscal black hole. Instead, it seems that lowering and freezing thresholds is now being considered – taxation by stealth in other words. In the following analysis, Shaun Moore, tax and financial planning expert at Quilter, tells us why he thinks such a move would deliver yet more complexity to the tax system, which let’s face it, is complicated enough already, and why thresholds really do matter.
Moore comments: “The idea of cutting income tax thresholds is essentially an attempt to pretend that the last few years of high inflation never happened. People have already been dragged into higher tax brackets simply because their wages have risen only to stand still in real terms. Lowering the thresholds now would compound that injustice. For many households that combination will feel incredibly regressive and make them poorer in real terms despite on paper having higher salaries.
“For someone earning £44,000 today, extending the freeze alone increases their tax bill by £843 over the next four years. Cutting the higher rate threshold to £45,000 and freezing it raises their total extra tax to £2,978, assuming the National Insurance upper earnings limit also moves down in line with the new threshold.
“For a worker earning £40,000 today, the freeze adds £321 over the period to 2030. Lowering the threshold to £45,000 with the freeze then increases their total additional tax to £1,010.
“Income tax thresholds are meant to provide protection against fiscal drag not used as a tool to raise ever more revenue. Freezing them for years has already brought record numbers of people into higher rate tax. Actively cutting the thresholds would be a far more aggressive step and risks pulling millions more people into paying higher rate tax almost overnight. If the government then extends the freeze into future years, it pours fuel on the fire. Fiscal drag becomes a defining feature of the tax system, with more and more people becoming higher rate taxpayers simply because inflation did the heavy lifting for the Treasury.
“Politically the attraction of threshold changes is obvious. Ministers can say income tax rates are untouched while still raising many billions. But it is hard to square that with promises to protect “working people”. It is a blunt and opaque tool and risks eroding trust in the tax system at a time when the public expects clarity and honesty about the fiscal choices ahead.
“If inflation has taught us anything it is that thresholds matter. They define who bears the burden of tax. Resetting them in real terms after years of high prices will not feel like stability. In a survey of 267 Quilter customers, conducted in October 2025, it found nearly half (48%) of respondents would prefer any future tax rises to come through explicit rate changes, rather than stealthier measures like extending frozen thresholds or reducing allowances. Reeves might think this move side steps more criticism but it is likely to do the opposite. Instead the idea of a “smorgasbord” of tax changes introduces yet more complexity to a tax system already plagued with it.”
