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Chancellor Rachel Reeves is contemplating breaking one of Labour’s principal election commitments by increasing income tax in next month’s budget to address a £30 billion fiscal deficit, as per senior government insiders.
Three individuals close to the budget discussions informed The Guardian that negotiations between the Treasury and No 10 have intensified in recent weeks, with officials assessing how to achieve a sustainable revenue increase without resorting to further tax hikes later in the parliament.
While no definitive choice has been made, advisers believe that elevating income tax might be the sole method to gather sufficient funds to restore public finances and create “headroom” for potential future tax reductions before the next election.
The fiscal dilemma has been exacerbated by the Office for Budget Responsibility’s (OBR) decision to lower the UK’s productivity forecasts, a move anticipated to cost the Treasury approximately £20 billion annually.
Reeves must also discover resources to reverse the winter fuel allowance decrement, eliminate projected welfare cuts, and abolish the two-child benefit limitation — all actions previously criticized by Labour backbenchers.
Despite decreasing gilt yields reducing the government’s debt servicing expenses by an estimated £2–3 billion, the relief is minimal. Minor actions, like increasing National Insurance for partners in legal and accountancy firms, are believed to yield no more than £2 billion.
Insiders indicate the Treasury is deliberating several forms of income tax adjustments:
• A 1p increase in the basic rate, from 20p to 21p, would generate roughly £8.2 billion annually, but could ignite public frustration during a delicate cost-of-living recovery.
• A 1p rise in the higher rate, from 40p to 41p for incomes surpassing £50,271, would produce about £2.1 billion.
• An additional rate increase for those earning over £125,000 would yield only £230 million per penny.
Reeves is reportedly conflicted between upholding her promise to safeguard working families and ensuring that public finances adhere to her strict fiscal criteria. One senior Treasury insider remarked:
“There is an ongoing discussion about how much headroom we desire. If we set high aspirations, we may not need to come back and increase taxes again — but that makes it more probable we’ll need to raise income tax now.”
While the Chancellor and Prime Minister Keir Starmer persist in asserting that Labour’s manifesto commitments “remain intact,” they have refrained from outright eliminating the possibility of tax increases.
Reeves is sharply conscious of the political repercussions that would arise from renouncing her prior commitment, especially after she broke another vow last year by raising National Insurance. Advisers indicate she wishes to ensure that any new revenue strategy is framed as “a one-time, responsible measure to protect economic stability.”
The Budget Board — co-chaired by Treasury minister Torsten Bell and the Prime Minister’s chief economic adviser Dame Minouche Shafik — is currently evaluating the competing alternatives.
One suggestion, supported by the Resolution Foundation, would involve a 2p increase in the basic rate of income tax while employee National Insurance contributions decrease by 2p, effectively shifting more of the burden onto retirees and landlords, who do not pay NI.
Ruth Curtice, director of the think tank, stated:
“Among all major taxes, increasing income tax aligns best with the UK’s existing economic challenges of sluggish growth and persistent inflation. Regardless of whether rates are adjusted, we require broader tax reform to mitigate the disparity between earned and unearned income.”
Next month’s 26 November Budget is gearing up to be one of the most politically charged in years. Reeves faces pressure to demonstrate her fiscal responsibility to markets while upholding the government’s credibility with voters still impacted by years of austerity and escalating living costs.
As one Treasury official articulated: “The politics are unfavorable either way. What matters is executing the correct action.”
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