The government has announced it will need to raise taxes to address what it describes as a £22 billion “gap” in public finances. Prime Minister Sir Keir Starmer has warned that the first Budget under his administration, set for October 30, will be “painful.” However, the Labour Party has ruled out increasing taxes on “working people,” such as VAT, income tax, and National Insurance.
So, which taxes might be targeted?
1. A ‘Stealth Tax’
One potential approach is to implement a “stealth tax,” a method of raising revenue that is not explicitly identified as a tax. Paul Johnson, director of the Institute for Fiscal Studies (IFS), suggests that adjusting tax thresholds— the income level at which taxes begin—could be the most straightforward solution. Currently, thresholds for income tax and National Insurance are frozen until 2028, a policy set by the previous government. Labour could choose to extend this freeze further.
This policy effectively increases taxes through “fiscal drag,” where more individuals end up in higher tax brackets as wages rise. The Resolution Foundation, a think tank focused on improving living standards for low-to-middle income families, estimates the current freeze will generate about £40 billion in revenue by 2028. Its director, James Smith, has indicated this could be sufficient to cover the “shortfall” in public finances, allowing Labour to avoid raising other taxes.