Chancellor Rachel Reeves has stopped short of ruling out an income-tax increase in next month’s Budget, amid reports that she is considering breaking a key Labour manifesto promise to balance the nation’s books.
Asked directly about 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 declined to repeat her earlier categorical commitment not to raise income tax, National Insurance or VAT.
Her carefully worded comments, made during a visit to Leeds on Friday, mark a shift from her stance in September, when she insisted Labour’s “manifesto commitments stand”.
Labour’s 2024 manifesto pledged not to increase the basic, higher 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 lifting higher-rate thresholds for top earners.
Reeves faces one of the most constrained Budgets in modern times. The Office for Budget Responsibility (OBR) recently downgraded UK productivity forecasts, blowing a £22 billion hole in the public finances and wiping out much of the £10 billion headroom she had set aside in March’s spring statement.
Government borrowing hit £20.2 billion in September — the highest for that month in five years — according to the Office for National Statistics, leaving the chancellor with limited scope to meet her own fiscal rules without raising additional revenue.
Reeves told reporters she understood that “the cost of living is still people’s number-one concern”, but emphasised her commitment to “support working people while ensuring sound public finances”. She added that although inflation had “come in better than expected”, significant challenges remained.
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 will “almost certainly” have to raise taxes to remain within those limits. Analysts note that while the effective interest rate on UK debt has fallen to its lowest level in over a year, the relief it offers is insufficient to close the gap.
Reeves has repeatedly signalled that “those with the broadest shoulders should pay their fair share”, suggesting a focus on wealthier individuals and professional partnerships used by lawyers and accountants.
However, economists say such targeted measures would raise only a fraction of the required sum, meaning that more politically sensitive options — including an income-tax rise — remain on the table.
If implemented, it would be the first increase in income-tax rates since 2010, when Labour introduced a 50 per cent top rate on earnings above £150,000, later reduced to 45 per cent by the coalition government.
At present, income above £12,570 is taxed at 20 per cent, rising to 40 per cent for income between £50,271 and £125,140, and 45 per cent above that threshold.
The Budget on 26 November will be a defining moment for Reeves as she seeks to reconcile fiscal credibility with political caution. Any move to raise income tax would risk a backlash from voters but could also reassure markets that Labour remains committed to disciplined, rules-based economic management.
As one Treasury insider put it this week: “She knows the politics are tough either way — but if she gets this right, it could buy her the credibility she needs for the long term.”
