Reeves not ‘playing fast and loose with people’s money’ amid tax U-turn reports

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The government has reportedly U-turned on its income tax U-turn – effectively coming full circle.

“It would mean they could avoid the associated drama of going against a manifesto promise, but the Treasury would need to pull other tax levers to close the gap in its finances.

“One thing on the table is a longer freeze in income tax thresholds. This has been an effective stealth tax already, and freezing the thresholds for two more years could mean that by 2030, one in four people will pay higher rate tax.

“HL calculations show that freezing the thresholds for two more years, instead of increasing with wages (assuming wages are up 4 per cent), means someone earning £60,000 might pay an additional £1,529 by the end of 2029/30.

“Crossing a threshold doesn’t just mean you pay a higher rate of income tax. It also means any dividend tax or capital gains tax is paid at a higher rate.

“Plus, your personal savings allowance halves or disappears overnight. It’s more important than ever that you take advantage of all the tax-efficient options that make sense for your circumstances – from pensions to ISAs.

“To close the gap, the FT suggested the government could even consider cutting income tax thresholds.

“A reduction of the personal allowance of £12,570 might be less likely because of the impact on lower earners, and the fact that it would push some people living off the flat rate state pension alone into paying tax – opening a whole new can of worms.

“Instead, any change to thresholds might involve people paying higher rate and additional rate tax on lower incomes.

“It could also mean lowering the £100,000 threshold when your personal allowance starts to taper and you pay an effective tax rate of 60 per cent. Making more people pay such a high tax rate would be highly unpopular.

“These changes could protect basic rate taxpayers, but everyone else would pay the price. If, for example, the higher rate tax threshold fell to £46,000, it would cost someone on £50,000 an extra £800 a year.

“This extra tax pain wouldn’t be enough to close the gap for the government, so would be likely to come alongside a host of other changes.

“The FT suggests there could be a higher tax on more expensive properties. There are several options available to the government, but one of the simplest could be a rise in council tax for those in the highest bands.

“This could be imposed as a national surcharge – going to central government rather than local authorities.

“Another option would be to introduce a new higher band for more expensive properties – something considered during the coalition government when George Osborne was at the Treasury.

“Wales has already done this in its devolved system, introducing Band I when council tax bands were revalued, and Scotland is considering more bands as part of wider reform.

“However, this approach would mean revaluing at least the priciest properties in the UK, which would come at a cost.”