Stealth taxes are an interesting phenomenon. Politicians (of all parties) harbour the illusion that paying more tax because the thresholds at which certain tax bands kick in have been frozen rather than rising with inflation is technically, morally and spiritually different from paying more tax because the headline rates have been hiked. Or, at least, they imagine voters will notice less (which in politics is much the same thing), even if the actual amount of extra money coming out of their pockets is the same.
And to some degree, they are right. Had Rachel Reeves chosen to break the Labour manifesto commitment not to raise the three main levers of taxation and hiked income tax, you can bet workers across the country would have paid attention – either right away from newspaper frontpages, or at the very latest in April when faced with a smaller amount going into their bank accounts. Extending the tax threshold freeze imposed by the Conservatives in 2021 for two years longer than expected is much less readily apparent: you won’t see on your payslip the extra amount you would have had if thresholds had been unfrozen. This continuation of fiscal drag is forecast to net Reeves £9bn, and forms the centrepiece of the “smorgasbord” of tax rises delivered in her Budget.
If Reeves hoped to get away with this, she will be disappointed – the threshold freeze tops the list of Budget measures in almost every news outlet. She is also wrong to think voters will not care. More In Common polling conducted before the Budget found that nearly half of voters – 47 per cent – consider freezing tax bands a manifesto breach. That includes 40 per cent of people who voted Labour in 2024. In the words of Gaz, a council worker from Leigh: “They’re still taxing you more aren’t they? If the rate before you start paying tax comes down, it’s still a tax rise. It’s just not called a tax rise.”
I have no idea if Gaz is a graduate with a post-2012 student loan, but if he is, there’s another nasty stealth tax hidden in the Budget – one that has got far less coverage. As well as declining to raise the thresholds at which workers pay various levels of tax in line with inflation, the Chancellor is also freezing the threshold at which graduates start to repay their loans, for three years starting from 2027.
At this point, some will no doubt make the argument that student loan repayments are not a tax. But for all but the most fortunate graduates whose parents could afford to pay their tuition and maintenance fees upfront they essentially function like a tax: an additional wedge of money deducted from a payslip each month, for decades – if not for the rest of their working life. Rates and thresholds have been messed about a fair bit since the coalition government tripled fees, but for young people beginning a course after 2012 and before 2023, the facts are these: an extra 9 per cent of tax on any income over £29,385. That’s not much all that much higher than the annual salary for someone working full-time on the minimum wage. And it’s going to be frozen. For three years.
The Budget document justifies the freeze by arguing: “Graduates generally benefit from higher earnings, and ensuring that they repay more of their loan is fair for those workers who have not gone to university.” Leaving aside stagnating wages that are dramatically reducing the graduate premium, graduates already repay a hefty amount for the privilege of having taken out a loan. Those on salaries above £30,000 face a 37 per cent marginal tax rate, while for anyone lucky enough to have a job that drags them into the higher tax bracket (£50,271) it’s 51 per cent.
Freezing loan repayment thresholds is forecast to increase receipts to the Treasury by £400m a year. Coincidentally, that’s the same amount Reeves hopes to raise with her mansion tax on properties worth over £2m. We heard a lot about the mansion tax in the run-up to the Budget and no doubt will continue to, as Labour hammer home their message about taxing the wealthiest more in the hope of staving off demands from the left for a more radical wealth tax (such as that which Zack Polanski is calling for). People living in multi-million-pound mansions rarely elicit much sympathy (although given how the housing crisis has pushed up prices over the past few decades, maybe that’s unfair). Funnily enough, we haven’t heard much about extracting the exact same amount from young people struggling on pretty average salaries.
Speaking of Polanski and the Greens, Labour might want to be careful. Of all the voter cohorts most likely to be politically engaged, young graduates are high on the list, up there with pensioners (who, incidentally, are being insulated by Labour’s continued commitment to the triple-lock). Those voters now have other options: 20 per cent of Labour’s 2024 voters now support the Greens (more than twice as many as have switched to Reform). In fact, the Britain Elects model of how graduates would vote right now shows 16 per cent heading to the Greens – an increase of seven points since 2024, while Labour are down 17 points. These voters about to be hit by not one but two stealth taxes while being told taxes on “working people” are not going up and that the Budget will “ensure the wealthiest contribute the most”.
Is Labour really confident they won’t notice?
[Further reading: The Budget: our writers’ verdicts]
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