How Rachel Reeves could tax you to pay for Labour's wealth exodus

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29-04-2025

The Chancellor could be about to break Labour's promise not to increase taxes for 'working people'.
Rachel Reeves has repeatedly vowed not to raise key taxes such as income tax, corporation tax or VAT. But she may have to disregard Labour's manifesto pledge if low economic growth wipes out forces her to put up taxes in the Autumn Budget.
In a worst-case scenario she could become the first Chancellor in 50 years to increase income tax rates, economists have warned.
It comes after Labour policies have triggered a fall in capital gains tax receipts and an exodus of the wealthy.
Economic forecasting group, the EY Item Club, has warned the country may require a 'fiscal policy rethink' after it downgraded growth expectations for 2025 and 2026.
The Donald Trump's tariffs are also expected to damage UK growth by raising prices and reducing export demand.
Tim Stovold, of accountancy firm Moore Kingston Smith, said the manifesto commitment not to increase the rates of income tax, National Insurance (NI) and VAT had 'deprived the Chancellor of the levers that could normally be pulled to collect more tax'.
He said: 'But this commitment was made before the recent fears of a global economic slowdown because of US policies. If there was ever a time to revisit this commitment in the light of today's economic headwinds, it is now.'
Here Telegraph Money outlines the different ways the Chancellor could raise tax on income in October's Budget.
Since Rishi Sunak froze income tax thresholds in 2021, government revenue from the levy has soared 36pc to hit £301bn a year.
The latest forecasts suggest eight million workers will be pulled into higher rates of tax by 2028, raising an extra £38bn per year for the Treasury.
In the Autumn Budget last year Reeves vowed to bring an end to the stealth tax raid, adding personal tax thresholds will be uprated in-line with inflation once again.
She said at the time: 'I am keeping every single promise on tax that I made in our manifesto.'
But it is now thought she may decide to row back on these plans because of low growth, high borrowing costs and the threat of trade war.
Sean McCann, of financial advice firm NFU Mutual, said: 'Extending the freeze on income tax thresholds and allowances has been the favoured method of increasing tax take without raising rates. As incomes increase, more people are dragged into higher tax bands.
'Current thresholds are set to remain frozen until 2028. It's likely we'll see this date extended to at least 2030 to ease the pressure on government finances.'
Raising income tax rates would be a simple yet unpopular way to boost the Treasury's coffers.
Earlier this month the director of the Institute for Fiscal Studies (IFS) urged the Chancellor to consider increasing the basic rate of income tax – currently 20pc – on the grounds that 'drastic action' was required following the US president's tariff bombshell.
A one percentage point increase in the basic rate would raise £8bn, while a two percentage point increase would generate more than £16bn, according to calculations by accountancy firm Blick Rothenberg.
However, it would deliver a significant blow to workers' pay packets. A worker on £30,000 would be £175 worse off if the rate increased to 21pc and £349 if it rose to 22pc. Meanwhile, a worker earning £50,000 would see their annual pay drop by £375 or £749 respectively
Another option would be to increase employees' National Insurance contribution (NIC) rates.
The Government recently raised employers' NI payments, effectively making it more expensive to hire workers.
But it could go a step further by increasing employee NICs as well – thereby undoing some of the tax cuts made under the previous Tory government.
Increasing the main rate for those earning over £12,570 from 8pc to 9pc would generate about £5bn a year, according to the government's own estimates.
However Mr Stovold said the Chancellor was more likely to go after higher earners given the far-reaching consequences of her employers' NI raid.
'The changes to the employer's National Insurance rates and threshold that applied from this April are widely thought to result in lower earners suffering pay freezes or below inflation pay rises.
'Therefore, the Chancellor is very likely to target higher earners, as further measures directed at lower earners would be seen as a hammer blow to those who can least afford it.'
However, increasing the additional rate of income tax by one percentage point would raise a mere £135m a year because of the small pool of taxpayers in this 45pc bracket.
By comparison, raising the additional rate of employee NI would raise £1.85bn. The 2pc rate currently applies to earnings over £50,270.
Alternatively the Chancellor could tweak the NI thresholds. Reducing the entry threshold by £2 a week would bring lower-earners into the tax net, raising £650m over the next three years.
Shaun Moore, of wealth manager Quilter, said this could be a politically insensitive move – 'as it would disproportionately affect lower-income groups who are already feeling the effects of inflation'.
In addition, the Chancellor could increase the upper earnings limit for higher rate taxpayers so that more of their income attracts the 8pc NI rate as opposed to the reduced 2pc rate.
Mr Moore said: 'Currently, higher earners benefit from a significant drop in their marginal NI rate once they pass the upper earnings limit. Removing or reducing this discount would raise substantial sums from high earners but could be criticised as a disincentive to high earners.'
Increasing the upper earnings limit by £10 a week could rake in £660m more over the next three years, according to HMRC's calculations.
If the Chancellor wanted to avoid being seen to explicitly increase tax, she could broaden the NI net instead.
Mr McCann said: 'Currently employers don't pay National Insurance on money they pay into their employee's pensions. HMRC estimates the cost of this at £23.8bn a year.
'Levying employers' National insurance at 5pc on money they pay into their employees' pension would raise significant revenue, without explicitly breaking manifesto commitments.'
The Chancellor increased the rate of employers' NICs from 13.5pc to 15pc in the October Budget.
Mr McCann added: 'As an additional measure, the Chancellor could seek to levy employee's National Insurance on those over state pension age, who currently escape the charge on their earnings.'
A Treasury spokesman said: 'As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.
'We are committed to keeping taxes for working people as low as possible, which is why at last autumn's Budget we protected working people's payslips and kept our promise to not raise the basic, higher or additional rates of income tax, employee National Insurance or VAT.'
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