What will Reeves do now?
Does the new Chancellor have wriggle room when it comes to taxation, asks Paul Lewis.
The new Chancellor of the Exchequer, Rachel Reeves, has wasted no time in setting out her plans to promote growth in the economy. But there is still a complete lack of detail about her plans for change in the tax we pay. In her first public speech as Chancellor the former Bank of England economist repeated Labour’s manifesto promise that there would be “no increases in National Insurance, the basic, higher or additional rates of income tax, or VAT”.
No change there then from a government that promised change! And probably no change, either, in the frozen tax allowances. The earnings level at which income tax kicks in has been frozen since 2021. Under plans set out by her Conservative predecessor Jeremy Hunt, that UK-wide freeze (and those of the higher and top-rate thresholds outside Scotland) would last until April 2028. As wages and pensions rise, an extra 3.8 million people will pay income tax by then, and an extra 3.2 million will pay tax at the higher rates.
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Before she was Chancellor, Rachel Reeves said she would like to raise tax thresholds but indicated she could not afford to. Frozen thresholds will bring in an extra £27 billion this tax year compared with if they had risen with inflation from 2021. That annual figure rises to £39.5 billion in three years’ time. One top accountant told me Reeves could even be tempted to freeze thresholds until the next general election in 2029/30, dragging more people into paying basic and higher rates of tax as wages and pensions rise above them.
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There is also speculation that in her first Budget this autumn – probably in mid-September – she may raise the tax on dividends. The first £500 of dividend income is currently tax-free and the rates charged above that are lower than those on income from earnings, pensions or savings. Neither the Chancellor nor her party’s manifesto made any promise about dividend tax rates and there have been calls to raise them to equal the rates of tax on other income. So if you have dividends, it may be worth starting a tax-free Isa and shifting them into that, but seek advice first.