Rachel Reeves is considering raising income tax in next month’s budget to help bridge a multibillion-pound shortfall, according to sources close to the Treasury. The chancellor is in active discussions about breaking a key manifesto commitment as she seeks to clear an estimated deficit of more than £30bn.
One option under consideration is adding 1p to the basic rate of income tax, which would raise over £8bn, though this could worsen cost-of-living pressures. Alternatively, increasing the higher or additional rates – which kick in at roughly £50,000 and £125,000 a year – would yield smaller sums of about £2bn and £230m respectively. Reeves is understood to be nervous about the political fallout from such a major U-turn, having already broken promises to raise national insurance last year.
Senior officials said the debate centres on how much fiscal headroom the chancellor wants to give herself against her self-imposed rules. Some advisers argue for a bigger buffer than the £10bn she pencilled in at the spring statement, which has since been eroded by changing economic forecasts. “There is a very live debate … about how bold we want to be on the headroom,” one person said, adding that going higher might require an income tax rise to avoid further tax increases later.
The pressure on Reeves has been driven largely by the Office for Budget Responsibility’s decision to downgrade its productivity forecasts, costing an estimated £20bn a year. She is also planning to raise an additional £2bn by increasing national insurance for professionals employed via partnerships, and hopes to pass planning reforms in time for the OBR to account for them. However, these measures are unlikely to provide enough certainty against future economic fluctuations.
Allies are urging Reeves to make a one-off decision to break the manifesto pledge, with the budget board – co-chaired by Treasury minister Torsten Bell and the prime minister’s chief economic adviser Minouche Shafik – currently weighing the options. The chancellor has not yet decided how much headroom to target, but the principle remains that those with the greatest ability to pay should bear the highest burden.
