Tax raid fears as minister issues statement about 'modest' incomes

Middle-income families could be in the firing line for a tax raid in the autumn Budget, a senior Labour minister has hinted.

Transport Secretary Heidi Alexander said Labour would not raise taxes on those with "modest incomes", raising the prospect that everyone else could well be forced to pay more.

Separately, Labour's Secretary to the Treasury, Darren Jones, said today that the government will stick to a manifesto commitment not to raise income tax, VAT or National Insurance on workers.

However, there is mounting speculation that other taxes will need to rise to cover a black hole in government finances.

Extending the freeze on tax thresholds from 2028 through to 2030 seems most likely, which would amount to a stealth increase on all workers.

At the same time, Labour is under pressure to target the super-rich with some sort of wealth tax.

Other options include a new raid on pension lump sums, a rise in fuel duty or council tax hikes on multi-million pound mansions.

Heidi Alexander told Sky News: “We made a commitment in our manifesto not to be putting up taxes on people on modest incomes, working people. We have stuck to that.

“We are determined, when it comes to taxation, that fairness is going to be our guiding principle.”

Ms Alexander insisted wealth taxes were not “directly” discussed at a Cabinet away day on Friday, but she declined to rule them out.

It marks the clearest signal yet that Labour is considering a series of tax hikes following a string of costly U-turns on winter fuel payments and welfare cuts. Insiders fear the tax burden - already at a 70-year high - could rise further under the guise of ‘fairness’.

The Chancellor is expected to set out more detail in her Mansion House speech this week, where she will pledge a Thatcher-style ‘Big Bang’ to boost the City and fire up economic growth.

Among the measures is a review of private sector pensions that could see employers forced to increase contributions under auto-enrolment, as ministers attempt to shift more of the retirement burden from the state to individuals and firms.

But the plan has already sparked alarm from business leaders, who warned it would hit struggling employers and put downward pressure on wages.

Kate Nicholls, chairman of UK Hospitality, said pubs and restaurants would be forced to “keep a lid on pay increases for managers and middle income earners”.

Craig Beaumont, of the Federation of Small Businesses (FSB), warned the proposed changes could prove a “nail in the coffin for job creation”, adding: “You won’t get growth or jobs if we get stuck in a cycle of constantly coming back with a new wave of employment costs, at the same time as the employment legislation heaps risk and so deters new jobs.”

The FSB revealed that for the first time in 15 years, more small firms expect to contract or close than expand - a grim sign for an economy Labour insists it wants to grow.

Meanwhile, Ms Reeves is also expected to unveil plans to slash red tape in the City, streamline hiring rules for executives, and prevent green campaigners from blocking defence-related investment, by giving regulators new powers over ESG (environmental, social and governance) standards.

The Chancellor had also wanted to cap tax-free ISA allowances, but was forced into a humiliating retreat last week following a backlash from building societies and savers.

Even so, pressure is mounting from Labour MPs to go further in taxing the rich. Former party leader Lord Kinnock and Welsh First Minister Baroness Morgan are understood to support a flat tax on assets over £10 million.

Others are calling for capital gains and dividend taxes to be aligned with income tax - effectively increasing the burden on investors, pensioners and entrepreneurs.

Experts believe Ms Reeves is likely to extend the freeze on income tax thresholds beyond 2028, dragging millions more into higher tax bands - a stealth move expected to raise up to £10 billion.

Andrew Griffith, the Tory shadow business secretary, accused Labour of planning to “drag Britain back to the worst economic mistakes of the 1970s”, adding: “They would price people out of jobs, deterring investment, and sending small businesses to the wall.”

Labour’s confusion over exactly who qualifies as a “working person” and the definition of a "modest income" has only added to the uncertainty - as they had vowed such people would not be targeted with tax rises.

Sir Keir Starmer said in June that they were “people who earn their living, rely on our [public] services and don’t really have the ability to write a cheque when they get into trouble”.

But the next day Ms Reeves offered a slightly different definition: “Working people are people who go out to work and work for their incomes. Sort of by definition, really, working people are those people who go out and work and earn their money through hard work.”

Critics say this ambiguity allows the Chancellor to increase business and payroll taxes while claiming to have honoured the party’s tax pledge.

Indeed, Ms Reeves was already accused of breaking her promise in last year’s Budget, when she raised employer National Insurance contributions - a cost that economists say is inevitably passed on to workers through lower wages.

A Treasury spokesman insisted: “The best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8 billion and cut borrowing by £3.4 billion.

“We are committed to keeping taxes for working people as low as possible, which is why at last autumn’s Budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee National Insurance, or VAT.”