As the UK prepares for the upcoming Budget, all eyes are on Chancellor Rachel Reeves and what financial decisions she might unveil.
Speculation is growing that Labour could break its manifesto promise not to raise income tax, as the nation faces a widening financial shortfall.
The Growing Financial Black Hole
Reports suggest the country’s finances are in serious trouble, with deficits swinging between £40 billion and £50 billion week by week.
This financial strain has already unsettled the bond markets, evidenced by a recent rise in gilt yields.
Experts are warning that the Budget may bring a “big nasty tax bombshell” akin to last year’s increase in employer National Insurance contributions.
Signals Pointing to Income Tax Hikes
Recent hints from informed sources, evasive answers from the Prime Minister and Reeves, and other signals indicate that an income tax rise could be on the cards from April 6 next year.
However, it is expected that any increase for workers will be offset by a reduction in employee National Insurance, meaning most of the 30 million workers paying both taxes may not see a net change in their take-home pay.
Who Will Be Most Affected
Despite reassurances for most workers, pensioners, the self-employed, and landlords could feel the brunt of the tax increase.
Pensioners, in particular, do not pay employee National Insurance, so they will bear the full impact if they continue to work alongside their state pension.
The Influence of Torsten Bell
Torsten Bell, pensions minister and key Budget adviser, appears to have heavily influenced these plans.
Formerly head of the Resolution Foundation, Bell has long advocated for more progressive taxation, increased welfare for the low-paid, and a review of the state pension triple lock.
Proposals from his former think tank closely mirror what the Chancellor is now planning: a 2p rise in income tax offset by a 2p reduction in employee National Insurance, creating new rates of 22% (basic), 42% (higher), and 47% (additional).
Reactions from Retired and Elderly Households
Many retirees are expected to react negatively, as their modest incomes are already squeezed by high energy bills, inflation, and a frozen personal allowance set at £12,570 since April 2021.
The planned 4.8% increase in the state pension will edge more retirees into taxable income, affecting those who rely on company or personal pensions as top-up income.
Additional Tax Measures Expected
The income tax shift alone won’t solve the budget deficit.
Additional measures could include a mansion tax on properties over £2 million, a clampdown on tax-free pension cash, stricter rules on inheritance tax mitigation, and changes to National Insurance for limited liability partnerships.
The Outlook for Workers and Taxpayers
For most workers, the Chancellor may spin the changes as neutral due to the National Insurance offset, but the reality is more complex.
pensioners, landlords, the self-employed, and higher earners are likely to face greater financial pressure.
Whatever the final details of the Budget, it seems clear that it will be a challenging day for taxpayers across the UK.