Higher earners face paying hundreds of pounds more in income tax as Rachel Reeves firms up plans for tax rises in the Budget.
The Chancellor has reportedly told the Budget watchdog that an increase in personal taxation will be among “major measures” she is getting ready to announce, The Times reported.
The Office for Budget Responsibility will assess the impact of Reeves’s Budget plans before informing the Treasury of its findings.
It is the clearest signal so far that Labour is planning to break its manifesto pledge not to raise income taxes and become the first Government to increase the basic rate in 50 years.
She is reportedly considering a 2p rise in income tax across all three rates and a 2p cut in the basic rate of national insurance (NI) – paid by employees below state pension age.
This means the NI cut would be limited to earnings below £50,270, with the rate cut from 8 per cent to 6 per cent. Earnings over £50,270 would still be subject to a 2 per cent rate, as they are now.
As a result those of working age earning under £50,270 from employment will not pay more tax than before – as their income tax rise will be offset by the NI reduction – but those earning above this will.
Pensioners and landlords would not benefit from the cut to NI either – as neither group pays this tax, so would pay more than they do currently.
Earlier this week the Chancellor warned voters that “we will all have to contribute” to bolster Britain’s economy.
How much would higher earners pay?
Under these plans, workers earning less than £50,270 would not see a change in their take-home pay, but those with higher salaries would be affected.
Someone earning £75,000 would see their take-home pay fall from £54,057 to £53,563 – a drop of £495, according to analysis for The i Paper by wealth manager Quilter.
A worker with a £100,000 salary would pay an extra £995 in tax. Their take-home pay would fall from £68,557 to £67,563.
Someone earning £125,000 would see their take-home pay slump from £78,057 to £76,313 – a difference of £1,745.
Those on £150,000 would pay an extra £2,246, with take-home pay slipping from £91,286 to £89,040.
The idea of adding 2p to income tax while taking 2p off NI was proposed by the Resolution Foundation, a think-tank previously led by Treasury minister Torsten Bell, which said it would raise £6bn while “protecting most workers” from the tax rise.
The money would be raised mostly from pensioners, who do not pay NI currently, as well as some other groups, such as landlords.
Currently, the basic rate of income tax is 20 per cent, or 20p in the pound. This rises to 40 per cent for those earning more than £50,270 and 45 per cent at more than £125,140 per year.
Shaun Moore, tax and financial planning expert at wealth manager Quilter, said: “This approach softens the blow for most workers and could be spun as only ‘bending’ a manifesto promise.”
In its 2024 election manifesto, Labour said: “The Conservatives have raised the tax burden to a 70-year high. We will ensure taxes on working people are kept as low as possible.
“Labour will not increase taxes on working people, which is why we will not increase NI, the basic, higher, or additional rates of income tax, or VAT.”
Splits are emerging at the top of Labour over the proposed income tax rise.
Labour’s new Deputy Leader, Lucy Powell, said the Government “should be following through” on its manifesto pledge not to raise income tax, national insurance or VAT.
She told the BBC: “Trust in politics is a key part of that because if we’re to take the country with us then they’ve got to trust us and that’s really important too.”
Powell said the Budget should be about “putting more money back into the pockets of ordinary working people”.
She added: “That’s what that manifesto commitment is all about. And that’s what this Budget will be about, I’m sure.
“It’s really important we stand by the promises that we were elected on and that we do what we said we would do.”
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