Rachel Reeves has reportedly told the Office for Budget Responsibility (OBR) that she intends to increase income tax in her upcoming Budget.
The Chancellor told the watchdog that a rise in personal tax is one of several “major measures” planned for the Budget at the end of the month, according to The Times.
She is said to be considering a 2p rise in income tax and a 2p cut in national insurance, which would cancel out the burden on workers and move it onto other groups, such as landlords and pensioners.
The cut to national insurance could be limited to people earning below £50,270 per year, while earnings over the threshold would still be subject to a two per cent rate, the newspaper reports.
The OBR will produce an impact assessment from her proposals to be presented to the Treasury on Monday, ahead of the Budget on November 26.
Proposals put to the OBR are not binding, but would indicate the government plans to break its manifesto pledge not to raise income tax.
Such a move could generate as much as £6 billion to help repair public finances, according to the Resolution Foundation think tank, which supported a ‘two up, two down’ package.
The Foundation assessed that the chancellor would need to require tax rises of at least £20 billion a year by 2029-30 to meet her fiscal rules.
Speaking to the same reported plans, AJ Bell assessed that pensioners would be the hardest hit.
An individual taking a pension of £35,000 would see their tax bill rise by almost £450 under the proposal, they found.
Some self-employed individuals who pay income tax but not national insurance would also be affected.
Scott Gallacher, director at Rowley Turton, told FT Adviser that while the impact on landlords may not garner much public sympathy, the furore around the scrapping of the winter fuel allowance “shows that granny is off limits as far as the Great British public is concerned”.
Reeves signalled in a speech on Tuesday that she could break the pledge in order to put “the national interest” ahead of “political expediency”.
Asked if she was willing to raise income tax, she said, without explicit affirmation: “If you’re asking what comes first, the national interest or political expediency, it’s the national interest every single time for me and it’s the same for Keir Starmer too.”
She also signalled that the government could raise spending to offset rising energy costs.
“As I take my decisions on both tax and spending, I will do what is necessary to protect families from high inflation and interest rates, to protect our public services from a return to austerity and to ensure that the economy that we hand down to future generations is secure,” she said.
Raising income taxes could help repair a hole of some £30bn in Britain’s public finances, but would likely come at a political cost.
The Institute for Fiscal Studies estimated in October that the chancellor would need to find £22bn to balance government finances.
They concluded the government would “almost certainly” have to raise taxes to make up the shortfall.
The OBR, whose forecasts drive government budgets, is also expected to downgrade its productivity trends by 0.3 percentage points, worth as much as £20bn.
