Rachel Reeves is weighing up the possibility of abandoning Labour’s manifesto commitment not to increase income tax. Reports suggest that the Chancellor is in talks about raising the main rate on employees, a move that could generate around £8bn.
If implemented, this would mark the first income tax increase since the 1970s when Denis Healey raised it from 30 to 33 per cent.
Reeves faces a significant deficit amounting to tens of billions of pounds in the upcoming Budget due to lower-than-anticipated growth and reversals on welfare reforms.
Labour’s previous tax pledges
Labour has consistently promised not to raise taxes on “working people” and its manifesto pledged not to increase income tax, National Insurance, or VAT. However, prominent economists argue that a series of small tax raids will not generate sufficient funds to address the £30bn deficit and could prove more economically harmful than increasing the main taxes.
Some advisers in the Treasury and Downing Street now believe that additional payroll taxes might be the only way for Reeves to adhere to her “iron-clad” fiscal rules, according to reports. One potential option involves a 1p increase on the main income tax rate, which could raise around £8bn, sources told The Guardian.
Political concerns and public trust
Reeves is worried that breaking the manifesto pledge would expose Labour to further political criticism from the Conservatives and Reform UK, and could be seen as targeting “working people”. Treasury sources previously indicated to The Telegraph that tax hikes were more likely to focus on the wealthy, whom Reeves has referred to as those with the “broadest shoulders”.
Reeves’s officials reportedly think that a one-time tax raid on incomes would enable Labour to avoid further tax increases for the rest of the Parliament, potentially allowing the Government to restore public trust before the next general election. However, this move could also negatively impact Labour’s poll performance against Reform, which has maintained a double-digit lead over the Government for months.
Upcoming local elections and budget decisions
Nigel Farage’s party is also predicted to secure a substantial share of Labour’s vote in the May local elections, which MPs anticipate will be a significant political challenge for Sir Keir Starmer. Reeves has reportedly already decided to increase the Government’s “headroom” in the Budget, providing more flexibility in public finances if unexpected spending shocks occur over the next year.
The Government has consistently attributed the size of the deficit Reeves must address to external factors, including Donald Trump’s tariffs, the conflicts in Ukraine and Gaza, and Brexit. “There is a very live debate going on right now among those planning the Budget about how bold we want to be on the headroom,” one source told The Guardian, adding that a higher level than the previous £9.9bn figure would make it “more likely that we have to raise income tax”.
Treasury sources respond
Two Treasury sources told The Telegraph on Thursday night that Labour’s manifesto pledge “stands”, which holds true until any Budget decisions are announced on Nov 26.
One source cautioned against certainty on tax decisions while the Office for Budget Responsibility is still evaluating some aspects of government policy as part of its “scoring” process.
However, the sources declined to comment on whether Reeves was already engaged in discussions about breaking the manifesto pledges on tax.