Rachel Reeves plots stealth tax raid on working people

The Chancellor is running out of options as the outlook for the public finances darkens - Oliver McVeigh/Getty Rachel Reeves is poised to launch a stealth tax raid on workers in the Budget as she struggles to balance the books.

Treasury insiders have indicated that extending a six-year freeze on income tax thresholds is one of the leading options as Ms Reeves prepares to confront a black hole in the public finances.

Advisers have also signalled that higher gambling taxes will be unveiled at the Chancellor’s second Budget this autumn, despite furious lobbying from the industry to try to shield horse racing from higher levies.

Sources said Ms Reeves was looking at extending a freeze on income tax thresholds that has remained in place since the Conservatives announced it in 2021.

Rising prices have left workers facing stealth taxes on their earnings because thresholds have been frozen rather than increasing in line with the cost of living.

This has raised the tax take for the Treasury by tens of billions of pounds as rising pay pushes more workers into paying income tax or into a higher tax bracket.

So-called fiscal drag is currently scheduled to end in 2028. However, one person involved in the discussions signalled that extending the freeze was one of the few options available to the Chancellor that could raise big sums and arguably not break Labour’s manifesto pledge.

“There’s ‘hot’ and then there’s ‘very hot’, and [this option] is on the very hot list,” the source said.

No decisions have been made. However, the option is said to be preferred over a raid on pensions, although this is still likely to be presented to the Chancellor depending on the size of the fiscal hole determined by the Office for Budget Responsibility (OBR).

Extending a freeze on income tax thresholds would raise roughly £7bn a year if stretched until the end of the decade. However, such a move would be politically controversial.

Labour has pledged not to raise taxes on “working people” and ruled out increasing income tax rates in its manifesto.

Ms Reeves toyed with the idea of the stealth raid last year before dropping the policy, concluding it would “hurt working people”.

However, the Chancellor is running out of options as the outlook for the public finances darkens. Economists have already warned that Ms Reeves’s buffer to meet her main fiscal rule not to borrow for day-to-day spending has evaporated against a backdrop of higher borrowing costs.

Some predict the deficit could be as large as £50bn, although most economists expect the Chancellor to raise taxes by around £20bn.

Angela Rayner urged the Chancellor to freeze the top income tax threshold of £125,140 where workers start to pay the 45p rate of income tax, in a secret memo revealed by The Telegraph in March.

Story ContinuesThe Deputy Prime Minister described the measure as “consistent with the manifesto”.

So-called fiscal drag is expected to boost the Treasury’s coffers by an extra £51bn a year in tax by the end of the decade, according to the OBR, which estimated in March that 4.1 million extra people will be dragged into paying the 40p or 45p rate of tax by 2027-28.

Reeves’s bet

Sources also signalled that an increase in gambling levies was also certain. Gordon Brown, the former prime minister, has been vocally campaigning for such a move, with Ms Reeves understood to be convinced of the merits.

The Government is currently consulting on replacing the various rates of betting and gaming duties with a single tax rate. The sector is already expected to pay £3.8bn in tax revenues to the Exchequer this financial year.

The bulk of revenues comes from remote gaming duty (RGD), which is a tax of 21pc applied to online gambling.

By comparison, general betting duty (GBD) paid by high street bookmakers is charged at a lower rate of 15pc. Online racing bets are also charged at the lower rate of 15pc.

Mr Brown has claimed that increasing and harmonising gambling taxes could raise a further £3bn. However, internal Treasury modelling suggests that lifting all rates to 21pc would only raise between £200m to £300m.

The horse racing industry has called for an unprecedented day of strike action amid speculation it will be hit by higher levies. The wider industry has hit back at claims made by a Left-leaning think tank that raising RGD and GBD to 50pc and 25pc respectively could raise an additional £2bn a year.

The Social Market Foundation argued in a report this July that higher taxes on online betting and gaming operators would generate billions in extra revenue and reduce societal harm.

However, the claims have been branded “highly flawed and misleading” in a seven-page memo sent to the Treasury by the Betting and Gaming Council this month. Its analysis suggested tax rises of this scale would only generate £467m in extra revenues and cost up to 6,000 jobs as venues close and more people are pushed towards betting on the black market.

Gambling executives and representatives have even discussed approaching Lady Starmer, who is a horse racing fan, to lobby on their behalf.

Gambling executives have discussed approaching Lady Starmer, who is a fan of horse racing - Max Mumby/Indigo Sources suggested government discussions about handing the horse racing sector a reprieve were still live.

However, a Treasury spokesman indicated that changes were coming to the “outdated and inconsistent” tax system.

The spokesman said: “We are consulting to level the playing field so all online gambling pays the same rate, working closely with the horse racing sector. We have no plans to change the way bets made at the racecourse are taxed, which are exempt from duty.”

Racecourse bets are exempt from gambling duties because they are already subject to a horse race betting levy (HBL), which is charged on the gross profits of all betting on British horse racing.

The Treasury has not yet revealed the date of Ms Reeves’s second major fiscal event. However, the Chancellor is required by law to give the OBR at least 10 weeks’ notice so they can prepare an economic and fiscal forecast.

With Parliament currently in recess, this suggests mid-November is the earliest possible date for the Budget.

A Treasury spokesman said: “We are committed to keeping taxes for working people as low as possible, which is why at last autumn’s Budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee National Insurance, or VAT.”

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