As the Budget approaches later this month, whispers of a significant shake-up in income tax are growing louder.
Many are bracing themselves for what could be a controversial move by the Chancellor, Rachel Reeves, potentially breaking Labour’s manifesto pledge not to raise income tax.
With a widening financial gap in the nation’s accounts—jumping between £40 billion one week and £50 billion the next—action seems unavoidable.
Bond markets are already reacting nervously, with gilt yields climbing over the past few days.
Observers suggest that this fiscal challenge, much of it tied to Labour’s earlier policies, leaves the Chancellor with little room for manoeuvre.
The Likely Income Tax Increase
Insiders and analysts are pointing to a scenario where income tax rates could rise from April next year.
But there’s a catch: the increase may be balanced by an equivalent cut in employee National Insurance.
For roughly 30 million workers paying both, the net effect could be negligible.
However, pensioners who no longer pay employee NI, landlords, and the self-employed could bear the brunt.
The move is widely believed to reflect the influence of Torsten Bell, pensions minister and key Budget adviser, known for his previous work at the Resolution Foundation think tank.
Bell has long championed policies that shift the tax burden from wages to a broader section of society.
Who Stands to Lose
Retirees may find themselves particularly squeezed.
The freeze on the personal allowance at £12,570 since April 2021 means more pensioners could be dragged into income tax brackets for the first time, especially as their full new state pension rises to £12,548 in April.
Those supplementing their income through company or private pensions will feel the impact most acutely.
Bell’s influence signals that this Budget is not just about raising revenue—it’s about reshaping the tax landscape, including measures that could affect the triple lock on pensions.
For the elderly, it could be the start of a tougher financial climate, especially alongside high energy bills and ongoing inflation.
What the Numbers Could Look Like
The proposed plan could see basic income tax rise to 22%, higher rate to 42%, and additional rate to 47%, generating around £6 billion for the Treasury.
While significant, experts note this will not close the nation’s £50 billion deficit alone.
Additional measures may include taxes on high-value properties, National Insurance reforms for partnerships, limits on pension tax-free cash, and restrictions on inheritance tax planning.
These combined changes point to a far-reaching Budget that will affect households across the country.
The Political Tightrope
Chancellor Reeves faces a delicate balancing act: appeasing Labour MPs eager for increased welfare spending, a higher minimum wage, and wealth taxes, while managing public anger over any manifesto breach.
Analysts suggest she may frame the income tax rise as a neutral move for most workers, relying on the National Insurance offset to soften the blow.
Her ability to navigate this political tightrope will determine not only the success of the Budget but also her future in the Cabinet, especially amid ongoing calls for her resignation over unrelated controversies.
A Challenging Outlook for UK Households
For the average taxpayer, particularly retirees and those with supplemental income, the upcoming Budget promises to be a challenging one.
While some workers may see no net change, the broader landscape of tax reforms and freezes will make financial planning tougher.
The message is clear: difficult decisions are coming, and households across the UK may need to adjust their expectations and budgets accordingly.