Chancellor Rachel Reeves has hinted at possible income tax rises in the forthcoming Budget, despite Labour's manifesto pledge not to increase the levy. The move is framed as necessary to fill a £30bn hole in public finances, with Reeves stating she must deal with the world as she finds it.
Income tax currently raises £330.7bn annually, about 27% of all tax receipts. A 1p increase on the basic rate from 20% to 21% would cost a worker earning £50,270 or more an extra £377 a year. For someone on the average UK adult income of £35,000, the bill would rise by £224 to £4,710. This option would generate £6.9bn in 2026/27, according to HMRC data.
Targeting higher earners brings in less revenue. Adding 1p to the higher rate (40%) would raise £1.6bn in 2026/27, while 1p on the additional rate (45%) would yield only £145m. However, it could shield average earners; a £55,000 earner would pay an extra £47 a year, and a £75,000 earner an extra £247.
Another proposal involves increasing income tax rates while cutting national insurance by two percentage points. This swap would raise £6bn while protecting workers' pay packets, according to the Resolution Foundation. The Institute for Fiscal Studies estimates that raising all income tax rates by 1p would yield almost £11bn a year by 2029/30, with most coming from basic rate taxpayers.
