Chancellor Rachel Reeves has not ruled out an income tax rise in next month’s budget, as reports suggest she is considering breaking a key Labor manifesto promise to balance the country’s fiscal position.
Asked directly about the discussions at the Treasury, first revealed by the Guardian, Reeves said she would “continue to support working people by keeping their taxes as low as possible” but refused to repeat her previous categorical pledge not to increase income tax, National Insurance or VAT.
Her carefully worded comments, made during a visit to Leeds on Friday, represent a departure from her stance in September when she insisted on Labour’s “manifesto commitment”.
Labor’s 2024 manifesto promised not to increase basic, higher or additional income tax rates. However, Treasury officials are said to be in “active discussions” about a 1p increase in the base rate, which could raise more than £8bn a year, or raising higher tax thresholds for top earners.
Reeves is facing one of the tightest budgets in modern times. The Office for Budget Responsibility (OBR) recently downgraded productivity forecasts for the UK, blowing a £22bn hole in the public finances and wiping out much of the £10bn of headroom it had envisaged in March’s Spring Statement.
According to the Office for National Statistics, national debt reached £20.2 billion in September – the highest that month in five years – leaving the Chancellor limited scope to meet her own fiscal rules without raising additional revenue.
Reeves told reporters she understands that “the cost of living is still people’s biggest concern,” but stressed her commitment to “supporting working people while ensuring sound public finances.” She added that while inflation has been “better than expected,” significant challenges remain.
Under Labour’s self-imposed budget rules, the Chancellor must ensure that national debt as a percentage of GDP falls by 2029/30 and that day-to-day spending is funded by tax revenues rather than borrowing.
The influential Institute for Fiscal Studies (IFS) warned this week that Reeves will “almost certainly” have to raise taxes to stay within those limits. Analysts note that while the effective interest rate on British debt has fallen to its lowest level in over a year, the associated relief is not enough to close the gap.
Reeves has repeatedly signaled that “those with the broadest shoulders should pay their fair share,” suggesting a focus on wealthier individuals and professional partnerships used by lawyers and accountants.
But economists say such targeted measures would raise only a fraction of the amount needed, meaning more politically sensitive options – including an income tax hike – remain on the table.
If implemented, it would be the first increase in income tax rates since 2010, when Labor introduced a top rate of 50 percent on income above £150,000, which was later reduced to 45 percent by the Coalition government.
Currently, income above £12,570 is taxed at 20 per cent, with income between £50,271 and £125,140 rising to 40 per cent and above this threshold to 45 per cent.
The Nov. 26 budget will be a pivotal moment for Reeves as she tries to balance fiscal credibility with political caution. Any attempt to increase income tax would risk a voter backlash, but could also reassure markets that Labor remains committed to disciplined, rules-based economic management.
A Treasury insider put it this week: “She knows the politics are tough either way – but if she gets it right it could give her the long-term credibility she needs.”
