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Chancellor Rachel Reeves is reportedly considering raising income tax in next month’s budget in a bid to close a £30 billion fiscal shortfall, according to multiple sources close to the Treasury.
The move, if confirmed, would mark a significant shift from one of Labour’s main manifesto pledges not to increase income tax, national insurance, or VAT. Yet with mounting economic pressures and limited fiscal space, advisers say Reeves may be forced to make a difficult decision that could define her tenure as chancellor.
A Growing Fiscal Gap
The Treasury faces a challenging financial landscape. The Office for Budget Responsibility (OBR) recently downgraded the UK’s productivity and growth forecasts, creating a funding gap estimated at more than £20 billion annually. On top of that, Reeves must also finance the reversal of the winter fuel cuts, scrap reductions to welfare payments, and potentially end the two-child benefit cap — measures expected to add billions in annual spending.
While falling interest rates on government debt have eased some pressure — saving between £2 and £3 billion — insiders say these gains are not enough to guarantee stability through the rest of the parliament.
Debate Within the Treasury
Sources told The Guardian that discussions within the Treasury and No. 10 are “live and intense.” One insider described the situation bluntly:
“No one wants to face another funding crisis mid-parliament. If we go for bigger headroom now, it likely means raising income tax — that’s the debate.”
Reeves is reportedly seeking more “fiscal headroom” than the £10bn buffer she set out at the spring statement. The aim is to ensure financial resilience and possibly create room to cut taxes before the next election. But doing so could require an immediate and politically risky tax rise.
Which Rate Could Rise?
The Treasury is divided over which income tax band should bear the burden. Several options are under consideration:
- Raising the basic rate by 1p, from 20% to 21%, could raise £8.2bn annually, but would impact most taxpayers and could worsen the cost-of-living pressures.
- Increasing the higher rate, paid by those earning above £50,271, from 40% to 41% would bring in £2.1bn a year.
- Raising the additional rate, paid by those earning over £125,000, would generate only £230m per penny increase — symbolically significant but fiscally minor.
Reeves has consistently said she wants those with the “broadest shoulders” to carry the greatest tax burden, suggesting she may lean toward targeting higher earners. Yet Treasury analysts note that the real revenue lies in the basic rate, not the top tiers.
Alternative Proposals on the Table
A hybrid idea promoted by the Resolution Foundation, once led by Treasury minister Torsten Bell, could provide a middle path. The think tank has suggested raising the basic rate of income tax by 2p while cutting employee national insurance by 2p.
Such a reform, they argue, would raise around £6bn while shifting more of the tax burden toward pensioners and landlords, who do not pay national insurance.
Resolution Foundation director Ruth Curtice said:
“Of all the major taxes, putting up income tax fits best with the UK’s current economic situation — low growth and sticky inflation. But longer-term reform should focus on reducing the higher effective tax rates on employment compared to other income.”
Political Risks for Reeves and Labour
For Reeves, the political stakes could not be higher. After already breaking one manifesto pledge last year by raising national insurance, another reversal could fuel criticism that Labour is abandoning its commitments within its first full year in power.
As one Treasury adviser put it:
“Rachel is understandably nervous. The politics is bad either way. But she knows the economy comes first — she needs a credible plan.”
Another senior official echoed that sentiment, saying the choice now revolves around how “bold” Reeves wants to be. Some in government argue for decisive action to plug the gap once and for all, avoiding the need for future tax hikes. Others warn that raising taxes too soon could risk public backlash and slow consumer spending during a fragile recovery.
Beyond Income Tax
Reeves is also pursuing smaller tax measures to raise additional revenue, including a plan to increase national insurance for professionals such as lawyers, doctors, and accountants working through partnerships — a move expected to raise around £2bn.
She also hopes to secure passage of the government’s new planning law, which could allow its projected gains to be included in the OBR’s fiscal forecasts. However, none of these measures alone would be enough to close the £30bn gap.
An Impossible Balancing Act
Ultimately, Reeves faces one of the most difficult budgets any chancellor has faced in years. With weak growth, fragile confidence, and the legacy of tight fiscal rules, her decisions in the coming weeks will shape not only Britain’s economic path but also the credibility of the Labour government.
As one senior official close to the discussions summarized:
“The politics is tough. But at the end of the day, it’s about doing the right thing — even if it’s unpopular.”
Whether Reeves chooses bold reform or cautious adjustment, all eyes will be on the November budget — and whether Britain’s new chancellor can balance the books without breaking public trust.
