The Chancellor will almost certainly hike income tax in the Budget.
Chancellor Rachel Reeves is playing with fire by hiking income tax (Image: Getty)
As yet, we just don’t know how. Westminster is convinced Rachel Reeves will target incomes because it’s the only way to find the tens of billions she needs to plug her black hole. However she spins it, this means breaking Labour’s manifesto promise. Voters will rightly feel cheated, and they won’t forget.
Panicking Labour MPs are warning her off. Culture Secretary Lisa Nandy and deputy Labour leader Lucy Powell have both urged Reeves to stick to her promises. Instead, she’s is expected to march straight into the fire.
No chancellor has hiked income tax for 50 years. Even Gordon Brown never went that far. But Reeves has been pushed into this by 16 months of serial bungling.
Around 38million Britons pay income tax, including nine million pensioners. The numbers are rising fast, because thresholds are frozen until 2028. Reeves is now considering extending that freeze to 2030, dragging millions more into her net.
And worse is coming. As details leak out, her income tax raid looks even more brutal than originally feared.
Originallly, analysts assumed she’d slap 1p or 2p on income tax, taking the basic rate to 21p or 22p. A 1p rise raises around £10billion a year. A 2p rise brings in £20billion. Painful, but simple.
But that would trash Labour’s promise not to raise taxes on “working people”. So Reeves may try something sneakier.
Labour-friendly think tank the Resolution Foundation has come up with a cunning ruse: hike income tax by 2p, but cut national insurance (NI) by 2p at the same time.
Workers would save on NI what they lose on income tax, so no change there. But here’s the trick. Pensioners don’t pay NI. Neither do landlords or many self-employed people. They’d take the full 2p income tax hit with no NI saving at all.
Bad enough. But now a darker twist has emerged. That NI cut will be capped.
The plan is this: Reeves will raise income tax by 2p and cut NI by 2p, but that cut will only apply to earnings below £50,270. Above that, there’s no saving.
So anyone paying 40% tax will get the pain but not the benefit, whether they’re workers or pensioners. And their numbers will grow every year due to the tax threshold freeze. Nice work, Chancellor.
At that level, the 2p income tax hike bites, while the NI saving disappears. It’s Labour’s old line about the “broadest shoulders” bearing more of the load.
The £50,270 threshold is where higher-rate tax jumps to 40%. Also, NI falls from 8% to 2%. Labour will say they’re only targeting those who can “afford it”. Yet by constantly hitting higher earners, they’re making it even less worthwhile to work harder or earn more.
Anyone earning more than £100,000 already faces an effective 60% marginal tax rate. That’s because every £2 earned above £100,000, a worker loses £1 of their personal allowance (the brainwave of a former Labour chancellor).
With Reeves’s plan, that would rise to around 62%, meaning a worker who gets a £1,000 pay rise would hand about £620 straight to HMRC.
That’s a huge tax trap that crushes ambition and aspiration. And Labour will no doubt carry on adding new ones.
Reeves will fiddle the figures so she can claim she hasn’t raised taxes on working people. But she has. And by trying to hide it, she’ll do even more damage. What did you expect?
