Middle earners still face £3,000 Budget hit – even after Rachel Reeves’s income tax U-turn

The move follows fears of a revolt within Labour over breaking election promises, with Downing Street reportedly worried about the political fallout for the Prime Minister.

Rather than raising rates outright, Rachel Reeves is now looking at freezing or reducing income tax thresholds – a change that would quietly pull millions more people into the tax system.

Quilter’s analysis shows that the changes would make a noticeable difference to people’s take-home pay. A worker earning £44,000 would end up paying an extra £2,978 over the next four years, even though the headline tax rates would stay the same.

If the Government simply extends the current freeze on tax thresholds, someone on £44,000 would pay an extra £843 over four years. But if the higher-rate threshold is cut from £50,270 to £45,000 and then frozen, the total extra tax paid would rise to £2,978, based on National Insurance limits moving in line.

A worker on £40,000 would pay an extra £321 from the freeze alone, rising to £1,010 if thresholds are lowered. Someone earning £50,000 could see their tax bill go up by roughly £750 a year, and a person on £100,000 could end up paying around £5,800 more if the top rate threshold falls from £125,000 to £100,000.

The Treasury’s change of direction emerged after reports of growing unease among Labour MPs about violating manifesto commitments, with Number 10 reportedly concerned about Sir Keir Starmer’s political survival.

Government sources indicated the shift occurred because Office for Budget Responsibility forecasts proved marginally less pessimistic than expected, with stronger wage revenues partially compensating for productivity downgrades, resulting in a £20billion deterioration rather than worse scenarios.

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The Chancellor still faces closing a fiscal gap of up to £40billion whilst rebuilding financial headroom eroded by policy reversals on winter fuel payments and benefit reductions.

Cabinet divisions reportedly ran so deep that two separate Budgets were prepared – one explicitly breaking manifesto pledges and another attempting to circumvent them through alternative measures.

Shaun Moore, tax and financial planning expert at Quilter, warned that reducing income tax thresholds would “compound the injustice” of fiscal drag, stating: “The idea of cutting income tax thresholds is essentially an attempt to pretend that the last few years of high inflation never happened.”

He explained that workers have already been pushed into higher tax brackets whilst their wages merely kept pace with inflation in real terms.

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“For many households that combination will feel incredibly regressive and make them poorer in real terms despite on paper having higher salaries,” Moore said.

He criticised the approach as “a blunt and opaque tool” that “risks eroding trust in the tax system at a time when the public expects clarity and honesty about the fiscal choices ahead.”

Financial markets responded negatively to the policy uncertainty, with sterling declining and government borrowing costs rising through increased gilt yields, though these eased slightly after Treasury statements reaffirming fiscal commitments.

Nigel Green, CEO of deVere Group, warned that “mixed signals” were creating conditions for a “credibility shock”, drawing parallels to the Truss administration’s market turmoil.

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The Resolution Foundation, typically aligned with Labour thinking, criticised the public nature of policy changes as abnormal and potentially damaging.

Health Secretary Wes Streeting welcomed the reported reversal on LBC Radio, acknowledging the Chancellor faced “invidious choices” whilst maintaining manifesto commitments.

Political tensions persist, with government insiders describing chaotic briefing processes and pointing to Treasury minister Torsten Bell and chief of staff Morgan McSweeney as sources of dysfunction.