Rachel Reeves, in a recent speech, hinted at the possibility of an increase in income tax in the upcoming budget. This comes despite Labour’s previous commitment not to raise income tax, national insurance, or VAT during the last election. The potential for a tax increase is seen as a response to addressing a £30 billion shortfall in public finances.
One potential option is to raise the basic income tax rate from 20% to 21%, which could cost taxpayers up to £377 annually, particularly affecting those earning above £50,270. This change could generate an estimated £6.9 billion in additional revenue for the fiscal year 2026-2027, according to the Office for Budget Responsibility (OBR), which forecasts a total of £23.4 billion over three years.
Alternatively, increasing the higher rate of income tax by 1p could yield around £1.6 billion in the same period, while an additional 1p on the additional rate, applicable to incomes above £125,140, would raise even less—approximately £145 million. This approach could be politically favorable as it appears to target wealthier individuals without affecting average earners, though the actual impact would vary based on income levels.
Another proposed strategy involves raising income tax rates while simultaneously lowering national insurance contributions. This plan could maintain income for the treasury by potentially raising £6 billion while alleviating some financial strain on workers.
Additionally, extending the freeze on personal tax thresholds, which has been in effect since 2022, could further increase tax revenue through fiscal drag. This would capture more individuals in the tax system without adjusting the thresholds for inflation.
As the autumn budget approaches, how the government chooses to address these financial challenges remains to be seen, impacting public and household finances in various ways.
Source: https://www.theguardian.com/uk-news/2025/nov/08/rachel-reeves-increase-income-tax-budget-rises-salary-bands