Chancellor Rachel Reeves is set to announce an extension to the freeze on income tax thresholds in a move that will pull more workers into higher tax bands through fiscal drag.

The measure, which has been reported to extend the freeze until 2030, is forecast to raise around £8billion a year for the Treasury and will affect approximately 10 million people – equivalent to almost one in five adults.

The decision follows updated projections from the Office for Budget Responsibility (OBR) which have given the Chancellor more fiscal room than previously expected.

It also comes after weeks of preparation for possible tax rises, with Ms Reeves warning on September 1 that avoiding such measures would require “deep cuts” to public investment.

The extended freeze would mark a shift in approach by allowing the Government to raise revenue without changing income tax rates themselves.

It would also preserve Labour’s manifesto pledge not to increase income tax rates while the Treasury evaluates alternative sources of income.

These include potential limits on salary sacrifice arrangements and new charges linked to electric vehicles.

Officials are understood to be examining what has been described as a “smorgasbord” of smaller tax measures rather than introducing a single major rise.

Among the options is a new levy on high-value properties which would mainly affect homes in London and the South East.

The threshold freeze is expected to hit middle earners hardest as rising wages driven by inflation push salaries into higher tax brackets, even though tax rates remain unchanged.

Shaun Moore, tax and financial planning expert at Quilter, calculates an employee earning £44,000 will pay an additional £2,978 in tax over four years if the thresholds stay frozen.

For someone earning £40,000, the freeze increases their bill by £321 during the same period.

Mr Moore said: “People have already been dragged into higher tax brackets simply because their wages have risen only to stand still in real terms.”

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He added the mechanism results in automatic annual tax increases without the need for parliamentary approval as long as thresholds remain static.

Economists and financial analysts have raised concerns about the wider consequences of the Chancellor’s decision.

Helen Miller, director of the Institute for Fiscal Studies (IFS), said that “the news that Rachel Reeves has backed away from a plan to increase the rates of income tax will lead investors to worry that the Chancellor will instead increase a range of smaller taxes that can be more damaging to economic growth”.

Market reaction appeared swift, with Government borrowing costs rising on Friday as gilt investors absorbed the implications of the shift.

Ms Miller said that markets may see the reversal as evidence “that this Government are reluctant to do politically difficult things”.

She cautioned that such perceptions could lead investors to “demand higher returns when lending to the Government”.

John Clamp said that frozen thresholds result in “annual tax rises without many taxpayers even realising,” which he argued risks eroding trust in the tax system.

The Prime Minister’s official spokesman said on Friday that despite the decision to maintain the threshold freeze, Ms Reeves’s November 4 speech on fiscal pressures “still stands”.

“She was very clear about the challenges the country faces and her priorities in addressing those challenges.”

The Chancellor is continuing to seek additional fiscal headroom to protect Government spending plans against potential economic uncertainty.

Ms Miller noted while adjustments ahead of fiscal events are not uncommon, reversals of this scale could intensify scrutiny from financial markets.

She said any smaller tax measures introduced alongside the threshold freeze should be designed to limit their impact on economic growth.

The Treasury has been contacted for comment.

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