Reeves urged to break Labour manifesto pledge and raise income tax
Resolution Foundation also suggests chancellor should cut employee national insurance to ease burden on workers
An influential think-tank has urged chancellor Rachel Reeves to break one of Labour’s key manifesto pledges by raising income tax in her November Budget, while at the same time providing workers with some relief by cutting national insurance.
The Resolution Foundation has proposed increasing income tax by 2 percentage points, but also reducing the rate of employee national insurance by the same amount, saying the changes would raise £6bn a year for the Treasury.
The think-tank, whose former head is now a Treasury minister, argued that the measures would shift the tax burden away from workers and on to pensioners, landlords and the self-employed.
However, the move would be politically hazardous, given that Labour’s election manifesto promised not to increase income tax, national insurance and value added tax.
Many economists predict Reeves will have to take tough decisions at her November 26 Budget in a bid to plug a fiscal hole estimated at more than £20bn.
“Significant tax rises will be needed for the chancellor to send a clear signal that the UK’s public finances are under control,” said Adam Corlett, principal economist at the Resolution Foundation, on Tuesday.
He added Reeves could raise revenue without “loading further pain on to workers’ pay packets” by “switching our tax base away from employee national insurance and on to income tax, which is paid by a far broader group in society”.
The Resolution Foundation’s “tax switch” would leave employee tax rates unchanged but mean those who pay income tax but not employee national insurance, such as pensioners, would be hit by higher taxes.
“This proposal would break the Labour manifesto policy of not raising the existing rates of income tax, but, importantly, this policy would not increase tax rates on working-age employees,” said the think-tank’s report about its proposals.
The basic rate of income tax is 20 per cent, while employees start to pay national insurance when they earn more than £242.01 a week.
Reeves has handed a role in preparing the Budget to Torsten Bell, the pensions minister who led the Resolution Foundation before he was elected a Labour MP last year. Fellow Treasury minister Dan Tomlinson also previously worked at the think-tank.
The foundation’s report urged the chancellor to go further on levelling the tax playing field by extending employer national insurance to limited liability partnerships, such as big law firms.
The government could also raise taxes on dividends, where the basic rate is only 8.75 per cent, the think-tank said. Together, these two measures could raise £2.5bn.
The foundation also said extending an existing freeze on income tax band thresholds into 2028 and 2029 “would be sensible” and secure £7.5bn.
Other suggested revenue-raising measures include addressing “worrying” growth in unpaid small-business corporation tax, which could raise £2bn.
Reeves has vowed to stick by her fiscal rule of funding day-to-day spending entirely from taxes by 2029-30.
The totality of the measures outlined in the Resolution Foundation’s report would increase tax revenues by more than £30bn by that year.
“If the challenge proves less than expected then we would not suggest pursuing them all in one event,” the report said.
The Treasury said: “The chancellor makes tax policy decisions at fiscal events. We do not comment on speculation around future changes to tax policy.”