Budget 2025: How could Labour increase income tax – and what would it mean for you?
The government is expected to break Labour’s manifesto promise not to increase income tax.
Chancellor Rachel Reeves has told the Office for Budget Responsibility (OBR) that she plans to increase personal tax in one of several “significant measures” planned for the Budget at the end of the month. Times.
The watchdog will carry out an impact assessment of the chancellor’s proposals to be presented to the Treasury on Monday, ahead of the Budget on 26 November.
Newly elected Labor deputy leader Lucy Powell has urged the government not to raise taxes in the upcoming Budget, warning it could damage “trust in politics”.
But amid speculation that Ms. Reeves was planning to take that step. Independent It takes a look at what your options are when it comes to income tax and what they might mean for you.
1p increase in 20p tax rate
When Ms Reeves said that “the world as it is Chancellor is not the world I would like it to be”, some suggested this could mean she was considering the first increase in the basic income tax rate in half a century.
This would be lucrative, as HM Revenue and Customs (HMRC) modeling shows changing the base rate by 1p would raise an additional £6.9bn in 2026/7, with a further £23.4bn over the next three years.
But the move will also be highly controversial and will affect each taxpayer differently depending on how much they earn.
Currently, in England, Wales and Northern Ireland (the Scottish parliament determines Scotland’s) tax is due at 20 per cent between £12,571 and £50,270, then 40 per cent between £50,271 and £125,140, and 45 per cent above £125,140; No payments will be made for earnings below £12,570.
Laura Suter, personal finance director at AJ Bell, said adding 1p to the basic tax rate, thereby increasing it from 20 per cent to 21 per cent, would be the “simplest option” if the government were to consider increasing income tax.
he explained Guard: “This will cost taxpayers up to £377 a year in extra tax, with anyone earning £50,270 or more facing maximum losses.”
The paper’s analysis reveals that someone on Britain’s average annual income of around £35,000 would have to pay an extra £224 a year if 1p was added to the basic rate.
1p extra on higher and additional tax
Ms Reeves insisted last month that those with the “broadest shoulders” should pay more tax, meaning targeting higher-income taxpayers cannot be ruled out.
However, this move will bring in less money overall.
According to HMRC estimates, changing the top rate by 1p would generate additional income of just £1.6bn in 2026/7 and £5.9bn over the next three years.
If 1p was added to the surcharge rate this would mean an extra increase of just £145 million in 2026-27 and £640 million over the next three years.
1p added in general
Ms. Reeves called for “each of us to do our part”; This could mean he is considering adding 1p to each tax rate, meaning higher earners will be hit harder.
Increasing all income tax rates by 1 percentage point would raise an estimated £11bn a year in revenue by 2029/30, according to the Institute for Fiscal Studies; The bulk of this revenue will come from increasing the basic tax rate.
The Guardian’s analysis shows that the move would lead to the average worker earning £35,000 a year receiving a wage of £224, whereas someone earning £55,000 would have to pay an additional £424 annually and people on incomes of £75,000 would pay an extra £624.
‘Two up, two down’ pack
The Chancellor is said to be considering a 2p rise in income tax and a 2p cut in national insurance; This will remove the burden from workers and transfer it to other groups, such as homeowners and retirees. The cut in national insurance may be limited to people earning under £50,270 a year, while earnings above the threshold will still be subject to a two per cent rate. Times reports.
Such a move could generate as much as £6bn to help repair the public finances, according to the report. Solution Foundation think tank.
The Guardian’s analysis reveals that the average earner earning £35,000 each year will see no difference in the amount of tax they pay. But AJ Bell’s director of public policy, Tom Selby, told the paper that a pensioner on the same income would see an increase in their annual tax bill of around £450, while a pensioner with a taxable retirement income of £65,000 would face a tax increase of more than £1,000.
He said the move would enable Ms Reeves to still “claim to be protecting the pay packets of ‘working people'”. “While hitting pensioners in the pocket is obviously unpopular – especially after the winter fuel payment fiasco – this could be seen as the least bad option,” he added.
Two-year extension of tax thresholds frozen
Personal tax thresholds, although traditionally adjusted to keep pace with inflation, have been frozen for the past three years in cash; This results in what economists call “fiscal drift,” meaning people are dragged into paying income tax or pushed into higher tax bands after receiving wage increases.
The current freeze was introduced by Rishi Sunak when he was chancellor in 2022 and is scheduled to end in 2028, but some believe Ms Reeves could extend it until 2030.
Ade Babatunde, senior director of financial planning at asset manager Rathbones, said: Guard: “This is taxation by stealth: rates stay the same, but a larger share of your salary disappears into the taxman’s coffers.”
The newspaper reported that Rathbones’ analysis showed that the policy would cause average earners earning £35,000 a year in 2022 to pay an additional £926 in tax by the end of the decade, while those earning £50,000 would have to pay an extra £4,632 and those earning £80,000 would have to pay £5,635 more.
