Rachel Reeves is preparing (Image: Getty)
Rachel Reeves is under mounting pressure as she prepares next week's spring statement, with economists predicting that one million more workers will be dragged into paying the higher rate of tax.
This figure comes from estimates that 600,000 more taxpayers will be hit by higher rates, while an additional 400,000 will start paying income tax for the first time due to fiscal drag.
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The Chancellor faces a ￡10 billion shortfall in the public finances, forcing her either to raise taxes or slash spending to stay within her own fiscal rules.
While she has ruled out an immediate extension of the income tax threshold freeze, experts warn that so-called 'stealth' tax rises are likely later this year.
The tax trap stems from a policy first introduced by Rishi Sunak in 2021. As Chancellor, he froze income tax thresholds for four years, meaning the 40p tax rate kicks in at ￡50,271 until 2026.
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Former Chancellor and Prime Minister Rishi Sunak (Image: Getty)
With wages rising but tax bands staying the same, more people have been dragged into higher tax brackets.
This mechanism, known as fiscal drag, has become a massive revenue-raiser for the Treasury.
Originally forecast to generate ￡8 billion a year, the Office for Budget Responsibility (OBR) now expects it to rake in more than ￡38 billion annually by the end of the decade.
Mr Sunak’s successor, Jeremy Hunt, extended the freeze for a further two years, and Labour has so far refused to reverse the policy.
Jeremy Hunt, who preceded Mr Sunak as Chancellor (Image: Getty)
The impact is staggering, with an extra 680,000 workers pulled into the 40p tax bracket last year alone. That figure is set to rise to nine million by 2028.
Independent economist Julian Jessop has warned that prolonging the freeze could push the total number of higher-rate taxpayers to ten million by 2030, telling This is Money: "That could raise ￡10 billion a year as another 600,000 taxpayers are hit by higher and additional rates.”
The Institute for Fiscal Studies (IFS) also estimates that 400,000 more workers will start paying income tax for the first time as wages rise. Combined, this means another one million Britons will pay more tax in the coming years.
Sanjay Raja, senior economist at Deutsche Bank, said stealth tax hikes are "likely" in the Autumn Budget. He added: "Extending fiscal drag could certainly come in handy when dealing with rising defence, energy, day-to-day spending, and public sector pay pressure."
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Rachel Reeves previously appeared to blame Donald Trump for her economic woes (Image: Getty)
In 1997, the higher-rate tax threshold was ￡30,200. If it had risen in line with inflation, taxpayers would now start paying 40% tax at ￡76,632, rather than ￡50,271.
The OBR will release its latest economic forecasts alongside Ms Reeves' Spring Statement, with expectations that it will slash its current 2% growth estimate for the UK economy.
The Chancellor has already attempted to blame Donald Trump for economic uncertainty, saying, "The world has changed.”
However, pressure is growing for her to set out a clear plan, with fiscal rules preventing her from borrowing to cover day-to-day spending.
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Reports have suggested that Ms Reeves will attempt to plug the gap by slashing red tape and cutting public spending, including potential welfare cuts of up to ￡6 billion.
At the same time, she has committed to increasing defence spending to 2.5% of national income by 2027, but some experts warn that further military investment may be needed amid uncertainty over Mr Trump's commitment to defending Europe.
A Treasury spokesman said: "At the Budget we announced we will not extend the freeze on personal tax thresholds and we are keeping our promise to not raise the basic, higher or additional rates of Income Tax, employee National Insurance or VAT."