Pensioners and landlords are set to bear the brunt of a possible income tax hike that could cost typical earners hundreds of pounds a year.
Chancellor Rachel Reeves has given her clearest signal yet that she is prepared to break Labour’s election pledge not to raise income tax, VAT or National Insurance, saying “we will all have to contribute” to efforts to rebuild Britain’s economy.
Speaking at Downing Street, Ms Reeves said her priorities were to reduce debt, support the NHS and ease the cost of living.
She added: “Each of us must do our bit for the security of our country and the brightness of its future.”
Her comments have fuelled speculation that the Chancellor is preparing a 2p increase in income tax in this month’s Budget – potentially offset by a 2p cut in National Insurance.
Under such a move, employees earning less than £125,140 would see their take-home pay remain roughly the same, as the tax they pay in National Insurance would instead be collected as income tax.
However, those who do not pay National Insurance – including pensioners and landlords – would see their bills rise sharply.
According to analysis by the Resolution Foundation, a 2p rise in income tax combined with a 2p cut in National Insurance could raise around £6 billion a year, largely from pensioners and property owners.
Adam Corlett from the think tank said: “This solution would leave employee tax rates unchanged, but would be a significant step in reducing disincentive to employment.”
He said it would also “target pensioners and landlords with higher tax bills because they do not pay national insurance”.
A pensioner on £27,500 would be £298 worse off a year if the basic rate of income tax rose by two percentage points, according to accountancy firm Blick Rothenberg.
Someone earning £35,000 would pay around £450 more, cutting take-home pay from £28,721 to £28,271. Those earning £60,000 would lose £754 a year, while a £100,000 earner would take home £67,807 instead of £68,561.
For landlords, the impact would also be steep. A property investor with £50,000 in rental profit would lose around £750 a year, rising to £1,250 for £75,000 profit and £1,750 for £100,000 – equivalent to nearly £150 a month.
Michael Browne from investment firm Franklin Templeton said: “Reeves’s speech suggested an austere budget with tax increases focused on non-inflationary measures, specifically income tax.”
He claimed that taxing higher earners and investors risked driving wealth overseas.
“Economic growth is unlikely any time soon, and taxing the wealthy will mean that many move to countries with less hostile tax environments,” he said.
The proposal would also come as millions of pensioners are dragged further into the tax net due to frozen thresholds. The new state pension, expected to rise to £12,548 next April, will sit just £22 below the tax-free personal allowance, meaning more retirees will soon pay income tax for the first time.
HMRC figures show 8.7 million pensioners already pay income tax, with 904,000 in the higher-rate band.
In 1980, the basic rate of income tax was 30%, but although rates have fallen to 20% today, frozen thresholds and stealth rises elsewhere have left taxpayers paying more overall.
David Goodfellow of Canaccord Wealth said: “Taxes sneak on in other places, like capital gains and inheritance tax. The short-term solution has to be increasing income tax, and the government has to swallow negative headlines and voter displeasure.”
Economists estimate that increasing all three income tax bands by one percentage point would raise £10.9 billion a year by 2029–30, with £8.5 billion coming from the basic rate alone.