What is a stealth tax and why is it so controversial?

The UK chancellor, Rachel Reeves, delivered a budget on Wednesday that contained few surprises, least of all the decision to freeze tax thresholds.

After ruling out an income tax hike at the last minute, Reeves instead focused on the thresholds at which people are required to pay more tax. The previous Conservative government froze the thresholds until 2028, and Reeves has extended that freeze until 2031.

Read more: Stocks rise and pound hits one-month high in budget aftermath

Some analysts and observers consider the freeze to be a stealth tax but what exactly does that mean?

Raising revenue

A stealth tax is considered to be a mechanism for raising revenue for the exchequer in a way that’s not explicitly made clear to taxpayers.

Freezing income tax thresholds does indeed provide more funds for the government, but it’s controversial because it can lead to people paying more tax despite no official tax rise being announced.

Because the thresholds are no longer rising in line with inflation, more people will pay income tax for the first time, or pay it at a higher rate. This could happen when their pay rises, for example. It is known as “fiscal drag” because of the way people are dragged into higher tax bands.

Why Reeves backed a freeze

The chancellor ultimately had limited options after backing away from an outright income tax hike. During her speech on Wednesday, she said she did not want to resort to “reckless borrowing” or a return to austerity, and made her decision with that in mind.

Read more: The autumn budget explained in five charts

It was also clear that her approach was designed to avoid spooking the bond market and prevent a repeat of the chaos that occurred after Liz Truss’ disastrous mini-budget in 2022.

Despite previously saying that freezing tax thresholds would hurt working people, Reeves said on Wednesday that her plans were fair and that “the biggest burden would fall on those with the broadest shoulders”.

She added: “I am asking everyone to make a contribution, but I can keep that contribution as low as possible because I will make further reforms to our tax system today to make it fairer.”

Strong reaction

In the immediate aftermath of the budget, many commentators continued to insist the freeze was an unfair stealth tax. Others questioned whether those who were better off would really feel the impact more than lower-paid workers.

Referring to the cost of living crisis, a spokesperson for the Unite union said: “On the fundamental issues of who pays for the crisis and the investment required to back British industry, the wrong decisions are being made.”

“The chancellor has picked a side. Health workers, engineers, and tanker drivers will pay through stealth taxes, while city bankers and billionaires go largely unscathed.”

Balancing the books and reducing its debt pile is a key priority for the government, and the freeze is seen by many ministers as one of the most effective ways of doing so.

Laura Suter, director of personal finance at AJ Bell, said the move was a “nifty” way for the government to raise money. However, she added that “the cumulative effect of the freeze means people are seeing their tax bills rise dramatically when compared to a system in which thresholds had increased by inflation each year.

“By our calculations, extending the freeze until 2031 will cost individuals up to £1,292 in extra tax over the next three years.”

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