Chancellor Rachel Reeves has not ruled out an income tax rise in next month's budget, amid reports she is considering breaking a key Labor manifesto promise to balance the country's books.
When asked directly about the Treasury discussions, first revealed by The Guardian, Reeves said she would “continue to support working people by keeping their taxes as low as possible”, but she refused to repeat her earlier clear commitment not to raise income tax, National Insurance or VAT.
His carefully worded comments, made during a visit to Leeds on Friday, mark a change from his stance in September, when he stressed Labour's “stance of manifesto commitments”.
Labour's 2024 manifesto promised not to increase the basic, top or additional rates of income tax. Yet Treasury officials are said to be in “active discussions” about adding 1p to the basic rate, which could raise more than £8 billion a year, or raising the higher rate threshold for top earners.
Reeves is facing one of the most limited budgets in modern times. The Office for Budget Responsibility (OBR) recently lowered Britain's productivity forecasts, leading to a £22 billion deficit in the public finances and wiping out most of the £10 billion target it set out in March's Spring Statement.
Government borrowing reached £20.2 billion in September according to the Office for National Statistics – the highest for that month in five years – leaving the Chancellor with limited scope to meet his own fiscal rules without raising additional revenue.
Reeves told reporters that she understood “cost of living is still people's number one concern”, but stressed her commitment to “supporting working people while ensuring strong public finances.” He said that although inflation “has come in better than expected”, significant challenges still remain.
Under Labour's self-imposed fiscal rules, the Chancellor must ensure that government debt falls as a share of GDP by 2029-30 and that day-to-day spending is funded by tax receipts rather than borrowing.
The influential Institute for Fiscal Studies (IFS) warned this week that Reeves would “almost certainly” have to raise taxes to stay within those limits. Analysts say that although the effective interest rate on UK debt has fallen to its lowest level in a year, the relief provided is insufficient to bridge the gap.
Reeves has repeatedly indicated that “people with broad shoulders should pay their fair share”, suggesting a focus on wealthy individuals and the professional partnerships used by lawyers and accountants.
However, economists say such targeted measures would raise only a fraction of the amount needed, meaning more politically sensitive options – including income tax increases – remain on the table.
If implemented, it would be the first increase in income tax rates since 2010, when Labor introduced a top rate of 50 per cent on earnings over £150,000, which was later reduced to 45 per cent by the coalition government.
Currently, income above £12,570 is taxed at 20 per cent, rising to 40 per cent on income between £50,271 and £125,140, and 45 per cent above that limit.
The budget on Nov. 26 will be a defining moment for Reeves as she seeks to reconcile fiscal credibility with political caution. Any move to raise income taxes would risk a voter backlash, but it could also reassure the market that Labor is committed to disciplined, rules-based economic management.
As one Treasury insider said this week: “She knows politics is hard either way – but if she gets this right, it could give her the credibility she needs in the long term.”
jamie young
Jamie is a senior reporter at Business Matters, with over a decade of experience in UK SME business reporting. Jamie has a degree in Business Administration and regularly attends industry conferences and workshops. When Jamie is not reporting on the latest business developments, he is passionate about mentoring budding journalists and entrepreneurs to inspire the next generation of business leaders.
