UK Income Tax and the 2025 Budget: Will She Or Won’t She ?

 

Rachel Reeves has a thorny problem on her hands. She needs to decide within the next 3 weeks (i.e. before the budget on Nov 26^th) whether to break the manifesto promise Labour made in order to get themselves elected in 2024, i.e. not to raise Income Tax, VAT or National Insurance.

She knows that breaking this promise will be a highly unpopular move and could spell electoral suicide for the party, with the process of decline starting in May next year, after the predicted whitewash of Labour seats in the next round of local elections.

She is also facing the increasingly gloomy financial outlook for the UK prophesied by the OBR, and is desperate to give herself as much financial ‘headroom’ as possible without breaking any of her self-imposed fiscal rules or ‘spooking' the markets by doing anything they perceive as financially ill-advised.

To add to the pressure, she has also been under the spotlight herself recently, in being yet another labour minister who has fallen foul of housing regulations – she managed to ignore the need to register as a landlord with her local council and obtain a permit before renting out her London house. So far she seems to have got away with this politically, although the opposition parties are still clamouring for a resignation. Starmer has clearly resisted sacking her so far in order to avoid losing his Chamcellor immediately before a critical budget, but afterwards...who knows.

The question therefore is: Should she or shouldn’t she….i.e. raise one or more of the 3 main taxes in the budget in order to bolster her financial headroom, and thereby break Labour’s 2024 manifesto commitments ?

Her appearance at a press conference 3 weeks before budget day was highly unusual, to say the least, and most are regarding it as a desperate attempt to ‘soften up’ the electorate in advance of a big tax hike. She will also want to have given advance notice to the markets that she intends to remain ‘financially prudent’. I suspect all she has done is to induce yet more fear of financial stress to come in the majority of voters, with 3 more weeks of torture to endure before we hear the worst.

Thus some sort of universal income tax rise is virtually certain on Nov 26..... 

We should, however, note that there was a rider to the manifesto promise - i..e. it applied to 'working people'. The manifesto didn't say anything about the rest of us, so as the adept lawyer that he is, Starmer may have decided to 'pull a fast one' and try to wriggle out of his commitment by somehow compensating the 'workers' group by lowering tax for them elswhere. It's probably no coincidence that he has now given us a definition of 'the workers' i.e. anyone earning less than £45k p.a. It will be interesting to see how teachers, train drivers, junior doctors, and the many other wage-earning groups earning more than this arbitrary, and actually rather low, figure actually respond to being told they’re not really the ‘workers’ they thought they were ! (Another shot at the ‘lammy of the year award’ by Starmer, perhaps, in an attempt to challenge his deputy's masterful 'multiple lammy' of 'mislaying' not just one prisoner but 3 this week, one of whom he hasn't managed to find yet ?).We will see whether the electorate (and his back benchers) are prepared to 'let him off the hook' on this one.

Government incompetence notwithstanding, the smart money at present is on a 2p rise in the basic rate of income tax, with a compensating 2p reduction in NI to mollify ‘the workers’.

Although 2p on the basic rate would raise ca £10Bn, the net effect on the wage packets of low earners would be minimal. This might just save Reeves from universal condemnation. Pensioners, however, would be hit by the tax increase without any compensating gain from NI, since they don't pay it. If she increases the higher and top rates of IT by the same margin, ‘Middle England’ will also be hit hard, given that most in this demographic will already have been drawn well into the higher rate band by the prolonged threshold freeze ‘stealth tax’ and will also lose an extra £750 on the £37500 of their income liable to basic rate tax.

Expect a lot more alienation amongst an already angry segment of the electorate (i.e. most pensioners) if income tax is hiked. If she does also raise the higher rate and top rates, she will really have a fiscal problem on her hands, since both middle England and the very rich would join the ranks of the aggrieved, and start taking defensive action to protect their finances wherever they can. The ballot-box penalty would be virtually certain, with a hammering for Labour at forthcoming local elections, and very little chance of a Labour 2nd term, even if they ditch Starmer and Reeves next June  and try a new leadership team.

This tax-raising move bears the hallmarks of Torsten Bell, who appears to be the principal driver of tax policy in No 10 at present and strongly favours wholesale wealth redistribution via taxation and an expansion of the public sector and government as a whole. It would however be self-defeating....

The reason for this is that most people with plenty of cash don’t really like the idea of giving a lot of it away to others, however deprived they might be….those affected most and who have enough cash and are in a position to leave the country will probably do so. Those who aren’t will look actively for ways to reduce their income…and rein in their spending, thus depressing the economy even further, just when we need it to expand. 

As discussed, there will be a high electoral price to pay for two hard budgets in a row, whatever the detail that emerges on Nov 26th. The downstream effects are also likely to 'spook' the large back bench contingent of new MPs who are keen to avoid becoming ‘one parliament wonders’ in 2029. We may even see open rebellion of the kind we saw with Winter Fuel and PIP reductions, in an attempt to limit the damage to their prospects.

Although one does feel a tad of sympathy with Reeves’ dilemma, continuing to increase the tax burden on the majority of us, while continuing to prop up excessive ‘big government’ spending and the 'selected few', will soon remove what little sympathy remains.

The hard fact is that this country badly needs to raise its productivity and create more wealth...we've all had that concept drummed into us over the last 15 months. Taxing us all to excess certainly won’t achieve any of that. And it could well induce a ‘wealth drain’ as well-off and canny investors also take fright and move their cash elsewhere.

Taxing the rich the most may be a laudable socialist aim, but is always likely to be self-defeating in the long run, since the 'rich' are already the ones that pay the most tax….and are best positioned to avoid it if they think they're being unduly victimised. If the top 1% of UK earners were all to leave the UK at once, tax receipts would be reduced by a massive 30% of the £305Bn received in 2024-5, which would make mincemeat of any extra receipts from a 2p rise in IT rates. Now there’s a statistic which should give the chancellor food for thought…..if it hasn't already.

All this uncertainty and pre-budget angst begs the question - "as voters with the responsibility of determining our country's economic future, should we really have been naive enough in July 2024 to believe a promise by any prospective Labour government not to raise taxes and spend to excess ?". As one who certainly didn't then, and still doesn't, my answer would be a firm 'No'.....what on earth were we thinking ?

For those who would like to take a look at the effects on their income of any prospective or actual tax rises, and would prefer not to risk sharing their intimate financial details with the rest of the internet via one of the many online calculators on offer, I’ve developed a simple stand-alone income tax calculator for MS Excel, which keeps your data private and does not require an internet connection. You can download this from my website, which you can find using this link. 

Best of luck on Nov 26th...I reckon we're all going to need it.

First published 4.11.25; Revised 7.11.25