Chancellor Rachel Reeves is reportedly considering raising income tax in next month's Budget to help fill a £30bn shortfall, according to sources close to the Treasury. Discussions include adding 1p to the basic rate or increasing higher and additional rates, which would break a key Labour manifesto pledge.
Some advisers in the Treasury and No 10 believe that raising income tax may be the only way to ensure sufficient revenue without needing further tax rises during this parliament. However, Reeves is said to be nervous about the political fallout, especially after previously breaking pledges to raise national insurance.
Adding 1p to the basic rate would raise over £8bn but could exacerbate cost-of-living concerns. Alternatively, raising the higher rate (from £50,000) or additional rate (from £125,000) would bring in smaller sums of about £2bn and £230m respectively. The Treasury is divided on which option to pursue.
One senior official described a 'very live debate' about how much headroom to create against fiscal rules. The chancellor wants more than the £10bn accounted for in the spring statement, which has been eroded by changing economic forecasts. Raising income tax is seen as a way to achieve greater headroom.
The Budget is complicated by the Office for Budget Responsibility's downgrade of productivity estimates, costing an estimated £20bn a year. Reeves also faces pressures from reversing winter fuel cuts, abandoning welfare cuts, and ending the two-child benefit cap. Falling interest rates on government debt have provided some relief, saving £2bn-£3bn.
Additional measures include raising £2bn by increasing national insurance for professionals in partnerships and hoping planning reforms are accounted for by the OBR. Allies are urging a one-off decision to break the manifesto pledge, with discussions ongoing within the budget board co-chaired by Treasury minister Torsten Bell and chief economic adviser Minouche Shafik.
