Bombshell as chancellor considers 1% income tax hike

Sara White, Editor, Business & Accountancy Daily, Croner-i

As the Treasury stays tight lipped about potential tax rises in the Budget, officials are busy briefing behind the scenes about a 1p increase in income tax, potentially breaking Labour’s big three tax pledge.

Despite pledges in the Labour party manifesto last year not to raise the big three taxes of income tax, national insurance and VAT, reports are now emerging that the chancellor, Rachel Reeves, is looking at a possible 1% rise in the basic rate of income tax, which would see a 21% base rate.

Treasury officials have briefed the Guardian newspaper that the chancellor is considering the option seriously and it is being discussed by the budget committee in HMT.

At a B&ADTV roundtable on Budget predictions, due to be released next week, tax experts all agreed that the only way for the chancellor to even begin to tackle the budget shortfall was to take ‘radical decisions on tax’ and to ‘stop salami slicing minor taxes which only raise small amounts of tax but inevitably damage growth and sap business confidence’. They all called for radical reform of the current tax system, which is outdated and over complex.

For the chancellor, the decision is highly political as breaking the manifesto pledge would be a major step. Last autumn, Reeves managed to duck the employer national insurance rise, saying it did not fall on ‘working people’, although it hit all the country’s employers and inevitably led to job cuts, particularly in the hospitality sector where the changes to the allowances affected their thousands of part-time workers.

This would be the first change in the 20% standard rate income tax since April 2008 when Gordon Brown, Labour chancellor at the time, cut the rate from 22% to 20% and came in for huge criticism for removing the 10% starting rate band.  

If Reeves were to go ahead with the 1% rise, everyone earning over £12,570 faces a bigger tax bill, with PAYE employees having yet more tax carved out of their pay each month. But this measure would raise at least £8bn a year in extra tax. In the 12 months October 2024 to September 2025 income tax receipts totalled £315bn and are shooting up with fiscal drag, up from £287bn in the same 12-month period the year previous.

It would be effective in the sense it would also hit a much wider audience than the alternative of an increase in employee national insurance contributions (NIC) as landlords, pensioners and the self employed would all be caught in the net.

Inevitably keeping the promise not to increase the big three was going to be incredibly hard, if not impossible, particularly as just before the last general election, former chancellor Jeremy Hunt made two cuts to employee national insurance, reducing the rate by 4% for PAYE workers in the January and April pay packets in 2024.

These tax cuts cost at least £12bn a year leaving a big hole in the Exchequer’s books, which cannot be addressed by the endless fiscal drag, pulling hundreds of thousands more people into higher rate 40% tax and spiralling tax burden, the highest since the second world war.

The other option under review is to increase higher rate tax to 41% and the additional rate to 46% but this would raise only a negligible amount of tax in comparison to any move on the basic rate.

The Treasury will not comment on any Budget plans before the key ‘fiscal announcement’ on 26 November.

Historic tax rates 1995-2025 - years of tax changes

Tax years	Lower rate	Starting rate	Basic rate	Higher rate	Additional rate	Bands £
1995 to 1996	20	n/a	25	40	-	-
1996 to 1997	20	n/a	24	40	-	-
1997 to 1998	20	n/a	23	40	-	-
1999 to 2000	n/a	10	23	40	-	-
2007 to 2008	n/a	10	22	40	-	-
2008 to 2009	n/a	n/a	20	40	-	-
2010 to 2011	n/a	n/a	20	40	50	> 150,000
2011 to 2012	n/a	n/a	20	40	50	> 150,000
2012 to 2013	n/a	n/a	20	40	50	> 150,000
2013 to 2014	n/a	n/a	20	40	45	> 150,000
2025 to 2026	n/a	n/a	20	40	45	> 125,140