Chancellor Rachel Reeves has signalled that a rise in income tax could be announced in this month’s budget, despite Labour’s manifesto pledge not to increase the levy. The move is seen as a potential U-turn to fill a £30bn hole in public finances. Income tax currently generates £330.7bn per year, accounting for 27% of all tax receipts.
One straightforward option would be to add 1p to the basic rate, increasing it from 20% to 21%. This would cost taxpayers up to £377 annually, with anyone earning £50,270 or more facing the maximum hit. According to HMRC, such a change would raise an extra £6.9bn in 2026-27. For someone earning £35,000, the increase would be £224.
Alternatively, Reeves could target higher earners by adding 1p to the higher rate (40%), which would generate £1.6bn in 2026-27. A 1p rise on the additional rate (45%) would raise only £145m. Increasing all rates by 1p would yield nearly £11bn by 2029-30, with basic rate taxpayers contributing the bulk.
Another proposed option is to increase income tax rates while cutting national insurance by 2 percentage points. This would raise £6bn while protecting workers’ pay packets, as the NI cut would offset the tax rise for employees. The move is seen as a way to shield average earners while still increasing revenue.
