Chancellor Rachel Reeves is being urged to consider raising the basic rate of income tax for the first time in 50 years by the Institute of Fiscal Studies’ (IFS) director.
Paul Johnson is calling on the Chancellor to follow in the footsteps of Denis Healey, the former Labour Chancellor, by taking “drastic action” in her autumn Budget.
Writing in The Times on Monday, Johnson said: “If Reeves does find herself in need of more money come the autumn, perhaps she should take a leaf from the book of her distinguished predecessor both as Labour Chancellor and as an MP for the city of Leeds: break the 50-year taboo, be honest and transparent in her choice of tax policy, and raise the basic rate of income tax.”
Tuesday marks exactly 50 years since Healey raised the basic rate from 33 per cent to 35 per cent when faced with surging inflation and high unemployment.
The Chancellor is being called to make a “drastic” change to tax policy
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Many analysts agree that income tax is the simplest way for the Treasury to bring in large amounts of revenue, but consecutive Governments have avoided taking this action.
A one percentage point increase in the basic rate would raise £8billion, according to calculations by accountancy firm Blick Rothenberg.
Furthermore, a two percentage point increase would generate over £16billion. In the years since Healey’s 1975 Budget, politicians have moved “heaven and earth” to avoid raising the basic rate, Johnson said.
The rate is currently charged at 20 per cent on income earned between £12,571 and £50,270. However, the move is deeply politically unpopular because it would leave millions of workers worse off.
A worker on £30,000 would see their annual pay fall by £175 if the rate increased to 21 per cent. This would rise to £349 if the basic rate went up to 22 per cent.
Meanwhile, a worker earning £50,000 would be worse off by £375 with a one percentage point increase. This would jump to £749 if the rate rose by two percentage points.
As a result, successive Chancellors have only ever reduced the rate since Healey’s 1975 Budget. Experts now predict that Reeves will be forced to either increase taxes or cut spending in the autumn Budget to avoid breaking her self-imposed fiscal rules.
Britain’s tax burden is already soaring to a post-war high. The income tax bill is expected to leap from £260billion in 2024-25 to £310bn in 2027-28.Despite this, some experts think further tax rises are now “inevitable”.
Nimesh Shah, the CEO of Blick Rothenberg, said: “Given the current state of the country’s finances, and global events likely to have fully wiped out the Chancellor’s fiscal headroom, it appears inevitable that income tax has to increase at the next Autumn Budget.”
However, Shah suggested the Chancellor might take a different approach.
“For me, a more likely ‘win’ for the Chancellor would be to reverse the Conservative government’s National Insurance cut citing that this measure was always unsustainable for the country’s finances,” he said.
Alternatively, Reeves could extend the freeze on income tax thresholds.
The previous Conservative Government chose to freeze these thresholds for years, generating billions in extra revenue by stealth.
This works as rising wages push workers into higher tax bands without explicitly raising tax rates.
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Britons are already paying more of their hard-earned cash to other tax bills
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Laura Suter, of stockbroker AJ Bell, said: “The Chancellor could extend the freeze further into the future if she wanted to continue this boost to taxes.”
Suter added that extending the freeze “is likely to be a more palatable option as it doesn’t strictly raise income tax rates and so doesn’t break the manifesto promise.”
This approach would continue the “back door” tax increases already in place.
“While Labour made an election promise not to raise taxes on working people, they have already done so by the back door by continuing with the income tax band freeze that started under the Tories,” she noted.
