Rachel Reeves signals Budget tax rises

Rachel Reeves has signalled that tax rises are unavoidable when she delivers her Budget later this month, arguing that “we will all have to contribute” to fixing the economy.

In a Downing Street speech, the Chancellor said she wanted the public to “understand the circumstances we are facing” as she prepares to fill a fiscal blackhole in the country’s finances estimated at between £20bn and £30bn.

Reeves did not confirm any specific policies ahead of the Budget but she declined to rule out breaking Labour’s election pledge not to raise income tax, national insurance or VAT.

And with her repeated references to the “challenges” the country is facing, she appeared to be dropping heavy hint that manifesto-busting tax rises are coming down the tracks.

“If we are to build the future of Britain together, we will all have to contribute to that effort,” she said.

Here’s how the measures Reeves could be considering in her Budget would affect you.

Workers

For millions of employees, the most significant change could come through income tax.

One likely option is extending the freeze on income tax thresholds beyond 2028. The freeze, introduced by the Conservatives, means that as wages rise, more people move into higher tax bands – a process known as “fiscal drag”.

In simple terms, even if your pay packet goes up, you can still end up paying more tax because the point at which you start paying higher rates doesn’t move with inflation.

The Institute for Fiscal Studies (IFS) estimates that extending the freeze to 2030 would raise around £10bn a year.

Labour has previously criticised this approach. In opposition, Keir Starmer called it “a tax rise on working people by stealth”. However, it would allow Reeves to raise funds without technically increasing tax rates.

For a worker currently on £42,000, which is slightly higher than the average wage for someone in full-time employment, the cost would be around £250 a year if their wage increased by 5 per cent – the current rate of average earnings growth – and inflation returned to its 2 per cent target. They would be dragged into paying higher rate income tax by 2030.

A more direct income tax rise is also possible. A 1p increase in all three income tax bands would raise more than £10bn a year, while a 2p rise could double that, according to HMRC figures. The Resolution Foundation has suggested offsetting such a rise with a 2p cut to national insurance, which would shift more of the tax burden onto pensioners and landlords.

For someone earning a roughly average salary of £35,000, a 1p rise in the basic rate of income tax would mean they paid around £225 extra per year. Someone earning £50,270 or more would face paying around £377 extra.

Raising the higher tax rate would potentially be less damaging to Labour politically.

If Labour raised the higher rate of tax from 40p to 41p instead of raising the basic rate, then nobody earning under £50,270 would be affected.

Higher earners would be impacted though. Someone on £75,000 would pay nearly £250 more per year, while someone on £100,000 would pay close to £500 more in tax.

Whatever the mix, workers could see smaller pay packets, either because they are pulled into higher tax bands or because the rates themselves go up.

The self-employed

Reeves has said she wants a fairer system that “protects those who cannot work and empowers those who can”. To do that, she could look at narrowing the gap between self-employed and salaried workers.

One option thought to be under discussion is to bring limited liability partnerships (LLPs) – used by around 200,000 professionals such as lawyers, accountants and consultants – into the scope of national insurance.

The Centre for the Analysis of Taxation says this could raise up to £1.9bn a year. It estimated, for example, that a solicitor earning £316,000 would face a new charge of about £23,000 under the plan.

The policy would mean that people working through partnership structures pay the same national insurance as employees. However, it could also increase costs for small firms and partnerships, which often use LLP status to stay financially flexible.

Self-employed people could also feel any change in income tax directly, since they pay both income tax and Class 4 national insurance through their annual returns. Even minor adjustments would affect their take-home earnings.

Landlords

Landlords could face new costs as Reeves looks for ways to spread the tax burden more evenly. One idea being examined is to make landlords pay national insurance on rental income for the first time.

Under a plan proposed by the Resolution Foundation, rental profits up to £50,270 would be charged at 20 per cent, and anything above that at 8 per cent.

This could bring in around £3bn a year, if Reeves adopts it.

It would mean that landlords are taxed more like workers, but could also lead to higher rents if property owners pass on some of the extra cost. A rise in income tax would also hit landlords, since rental income is taxed the same way as earnings.

Homeowners

Property is expected to be a significant target in the Chancellor’s hunt for revenue.

One option under consideration is a “mansion tax” on homes worth more than £2m, or an increase in council tax rates for the highest-value properties.

The IFS says doubling council tax on the top two bands could raise £4.2bn a year by 2029–30.

Another idea is to introduce new upper bands or an annual 1 per cent levy on property value above £2m – which would mean a £10,000 yearly charge for a £3m home.

The Treasury has also looked at shifting stamp duty from buyers to sellers on homes worth more than £500,000. This could make it easier for first-time buyers to get on the ladder but would add extra costs for those selling, particularly older homeowners looking to downsize.

These changes would mostly affect people with expensive properties, who could face higher annual bills or new taxes. Buyers might get a short-term benefit if stamp duty were shifted, though prices could adjust over time.

Savers

Reeves’s Budget is also expected to include changes for savers.

One idea under discussion is halving the annual tax-free cash ISA limit from £20,000 to £10,000, in a bid to encourage people to invest more in UK-listed companies instead of leaving money in cash accounts.

A new “British ISA” could also be introduced, giving savers an extra £5,000 allowance to invest in UK firms.

For people who prefer to keep savings in cash, this would mean less room to earn interest tax-free, but those willing to invest in the stock market could gain from new incentives.

The Chancellor is also thought to be reviewing pension tax relief, which currently costs around £50bn a year and benefits higher earners most.

A single flat rate of about 30 per cent for everyone is reportedly being considered. That would simplify the system and give basic-rate taxpayers more support, but reduce the advantage for those on higher incomes.

Families

Reeves is under pressure from Labour MPs to lift the two-child benefit cap, which stops most parents claiming child tax credit or universal credit for a third child. She could counter breaking the manifesto pledges on tax with this measure in a bid to placate sceptical MPs.

Scrapping the cap entirely would cost about £3.5bn a year, but partial measures are reportedly being explored – such as paying a smaller amount for additional children or removing the cap for working households.

Former prime minister Gordon Brown has backed proposals from the Institute for Public Policy Research (IPPR) to raise gambling taxes, which could bring in about £3.2bn a year and potentially pay for the cap’s removal. However, it has been reported that horse racing looks set to spared from any gambling tax rises.

Reeves said on Tuesday that her focus will be on “protecting those who need it most” while keeping the public finances sustainable. Any change to the cap would shape how her Budget balances help for families with the need to control spending.

Consumers

Everyday prices could rise if the Government raises taxes on specific industries. Even if Reeves avoids direct hikes to income tax or VAT, higher business costs often find their way to households.

It is unclear what the Chancellor plans to do with fuel duty, which has been frozen since 2011. If this were increased by one or two pence per litre, that would make petrol and diesel slightly more expensive, and because transport costs feed into everything from food to parcel deliveries, this could push prices up more widely.

New or higher gambling taxes could make betting, gaming and online casinos more expensive, with companies likely to pass part of the cost on to customers.

Reeves is thought to be reviewing VAT rules, too. Removing zero or reduced rates for luxury or non-essential goods would raise extra revenue but make certain items more expensive.

Everyday essentials, however, such as food and children’s clothes, are expected to stay zero-rated.

Reeves has suggested that she wants to cut shopping and energy bills, and bring down inflation, in a bid to counter tax rises in her Budget.