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 key 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, not least with her back-bench colleagues, and doing so, however justifiably in her eyes, could spell electoral suicide for the party. If the opinion polls are anything to go by, the process of Labour's decline started as soon as she announced the near abolition of  WFP last July; it could really start to snowball in May of next year, in the aftermath of the predicted whitewash of Labour seats in the next round of local elections.

The chancellor 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 only viable candidate for the post and (so far) a staunch ally, 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 recent appearance at a press conference 3 weeks before budget day was highly unusual, to say the least, and most pundits 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 really done is to induce yet more fear of financial stress to come in the majority of voters, with 3 more weeks of anticipatory torture for all of us 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 mortals, so as the devious 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 taxes for them elswhere. He could also really 'do the dirty' on the majority of higher earners by selectively rasing the higher and top rates of tax while leaving the basic rate alone. 

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 by 2025 standards, 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 not to be outdone by his deputy's masterful 'multiple lammy' on the prisons front. We will see whether the electorate (and his back benchers!) are prepared to 'let him off the hook' on this particular faux pas.

Government incompetence and disarray 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, and a potential lifting of the 2-child benefit cap,  might just save Reeves from universal condemnation. 

Pensioners, however, would be hit by the tax increase without any compensating gain from NI, since they have made a full contribution to NI over their working lifetime and therefore don't have to pay it. If Reeves 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 sucked well into the higher rate band by the prolonged threshold freeze ‘stealth tax’. They will lose proportionally on anything they earn above £50k and will also lose an extra £750 on the £37500 of their income which is liable to basic rate tax.

Expect a lot more alienation amongst an already very angry segment of the electorate (i.e. most pensioners) if their income tax is hiked selectively without any compensatory gain. If Reeves 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. This group tend to be 'tax savvy', since they have more to lose, and will undoubtedly 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 manage to ditch Starmer and Reeves next June (or even before) and install a new leadership team.

Interestingly, this tax-raising move bears all the hallmarks of Torsten Bell's 'tax and spend' approach - he 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. The problem is that any such wholesale change in emphasis, rooted in socialist idealism, in the near future would however be self-defeating....

The reason for this is quite simple - 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 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 and generate more wealth. 

As already discussed, there will be a high electoral price to pay for two hard budgets in a row, whatever the unpalatable detail that emerges rom Reeves' presentation 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 collective re-election 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’ and public sector spending and the selected few who fall within their narrow definition of 'workers', will soon remove what little sympathy remains.

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

Taxing 'the rich' the most may be seen as a laudable socialist aim in some quarters, but is always likely to be self-defeating in the long run in a highly competitive and capitalist world. The hard fact of it is that the richest members of society 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 just 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. A very recent headline in the press to the effect that she has scrapped the plan to introduce an 'exit tax' for wealthy citizens leaving the UK might suggest she is all too aware of this risk, and doesn't want to promote a surge in departures of cash as a result of budget anticipation.

Last but not least, there is another practical difficulty that will ensue if the tax rates are raised mid-finacial year. HMRC normally reckon up an individual's tax bill at the end of the tax year on the basis of a constant set of rates and thresholds over that financial year (i.e. April to April), Changing any of these on November 26th would mean the first 7 months (April-November 25) at the current rates and the remaining 5 months (December 25-March 26) at the new rates. If HMRC were to tax us all at the higher rates for the whole tax year for the sake of simplicity, they would leave the government open to legal challenges, which if upheld by the courts, could prove quite expensive, given the numbers involved. Doing it properly by splitting calculations into 2 halves on the other hand could put a significant extra drain on HMRC resources and individuals, given that HMRC would need self-assessment returns and employer PAYE information to be split accordingly. Yet more fun for the tax authorities then....we'll see in due course if Reeves is desperate enough for 'black hole fillers' to impose an immediate rise in rates and risk the chaos it could promote....

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.

Postscript 14.11.25: Today's headline by the FT suggesting Reeves and Starmer have abandoned the idea of IT rises, if true, would indicate outright panic at No 10. Given this week's 'phantom' briefing debacle, I wouldn't be at all surprised. We shall see...

Update 15.11.25: U-turns are coming thick and fast from this beleagured government - the abandonment of the IT hike now seems to be official, although only the 'red box' can confirm this on the day....

The question now is what else does Reeves have up her sleeve as a 'black hole stocking-filler' for Christmas ? 

A mansion tax (probably of 1-2% p.a. on properties over £5M) seems to be the latest front-runner, which would tie in nicely with Torsten's 'hammer the rich' philosophy (he seems to be running things at the treasury now). An IT threshold freeze extension beyond its current expiry date of 2028 to 2030 or even beyond is certainly also on the cards, as this would be a good revenue spinner and wouldn't break any manifesto promises. She could go a step further and actually reduce the higher and top rate thresholds, but this would be a step too far for 'middle england' to tolerate. I wouldn't be at all surprised to see some anti-pensioner measures in the mix either - the bus pass and free presciptions are still vulnerable, but would probably occasion too much ire from back benchers to be worth the paltry £3-4Bn it might save. The pension triple-lock is a more likely target, as is occupational pension salary sacrifice and the tax-free lump sum. Expect a possible reduction in the annual sacrifice allowance from the current £60k to ca £30k, and a reduction, or even abolition of the lump sum. When will the next announcement and matching u-turn come ? - your guess is as good as mine.... 

All this turbulence in government does raise the question as to where Labour are actually heading. We were promised a radical new approach to the 'old' politics in 2024, but the continual turmoil within government suggests a virtual civil war is raging between the hard left and the 'Starmer progressives' as they like to see themselves. The left were always likely to win out given Labour's roots - both the Blair governments of 'New' labour and Starmer will most likely be seen by the history books as anomalies. 

To be fair, this battle has been widely predicted, and seems to be coming to a head over the budget proposals. Far from the progressive approach we were promised, it looks as though we're in for a return to the 'old Labour' policies of the dreadful '70s, with a format of 'Tax, Tax, Tax and spend....and then Tax again'. 

Why did we give them a chance to revert to the bad old ways ? The electoral 'pendulum effect' was partly to blame, with everyone so fed up with Sunak's Tories that anything else was preferable. But the 'clincher' was that nobody under 65 was old enough to remember what it was really like to be an adult under the last Callaghan government before Labour's 'wilderness years' after 1979. Thus, as a population, we needed a reminder of past horrors...hopefully we'll learn our lesson from the current chaos and not make the same mistake again...until the next time, of course!

First published 4.11.25; Revised 16.11.25