Nearly nine million pensioners will be hit by an income tax raid at Rachel Reeves‘s upcoming Budget.
The Chancellor has paved the way for fresh levy hikes later this month after she used a Downing Street speech on Tuesday to warn Britons: ‘Each of us must do our bit.’
She also declined to stand by Labour‘s manifesto pledge not to raise income tax, National Insurance or VAT.
Ms Reeves is scrambling for revenue-raisers ahead of her fiscal statement on November 26 due to a multi-billion pound black hole in the public finances.
She is said to be considering a 2p rise in income tax, which would be mitigated by a 2p cut in National Insurance for earnings below £50,270.
But pensioners would not benefit from this relief because, unlike workers, they do not pay National Insurance.
Higher-earners would also lose out under the plans, which could raise more than £6billion a year, as there would be no National Insurance cut for earnings over £50,270.
Ms Reeves is said to be mulling plans to limit the National Insurance cut to lower earnings so those with the ‘broadest shoulders’ bear the biggest burden.
Rachel Reeves has informed the Budget watchdog she plans to break Labour’s manifesto promise by increasing income tax, it has emerged
Labour’s new deputy leader Lucy Powell warned ditching the party’s promise to voters on income tax, National Insurance or VAT would damage ‘trust in politics’
Figures from HMRC, obtained under the Freedom of Information Act by pensions consultancy LCP, show there are currently 8.8million pensioners paying income tax
Figures from HMRC, obtained under the Freedom of Information Act by pensions consultancy LCP, show there are currently 8.8million pensioners paying income tax.
This includes more than one million pensioners who pay higher or additional rate income tax.
Ms Reeves is reported to have informed the Office for Budget Responsibility (OBR) that a rise in personal taxation is one of the ‘major measures’ she will announce.
The OBR will now assess the impact of Ms Reeves’s plans after she informed the watchdog of her intent to hike income tax, according to The Times.
If Ms Reeves hikes the basic rate of income tax, it would make her the first Chancellor to do so in 50 years.
Accountancy firm Blick Rothenberg said a pensioner with an income of £27,500 a year would pay £298 more tax a year if the basic rate of income tax went up to 22p.
A pensioner who also had a rental property that took their income up £40,000 a year would be £550 a year worse off.
Robert Salter from Blick Rothenberg said: ‘Pensioners, those with letting income and those continuing to work past state pension age would all be losers from this change.
‘While some of these losers from the suggested change may have ‘broad shoulders’, to use the Government’s terminology, this is clearly not going to be the case on a consistent basis.’
It is estimated that 124,000 pensioners who currently pay the additional 45p rate of income tax would face paying an extra £2,500 a year to HMRC.
If you are an additional rate taxpayer you do not enjoy the tax-free personal allowance of £12,570.
Moore Kingston Smith, another accountancy firm, said putting 2p on income tax while cutting 2p from National Insurance would mean no change for a working person on the average £35,000 annual salary.
But someone on £100,000 would be £370 a year worse off and someone earning £130,000 would be £1,846 a year worse off.
In her speech on Tuesday, the Chancellor all but confirmed she will hit the country with fresh levy hikes as she highlighted the ‘challenges’ facing the UK economy.
In what was branded a ‘laundry list of excuses’ by critics, Ms Reeves blamed the Tories, Brexit, Covid and Donald Trump for Britain’s economic woes.
But she opened up an internal split within Labour by failing to commit to the party’s manifesto pledge on tax rises.
Labour’s new deputy leader Lucy Powell warned ditching the party’s promise to voters on income tax, National Insurance or VAT would damage ‘trust in politics’.
She told the BBC: ‘We should be following through on our manifesto, of course.
‘Trust in politics is a key part of that because if we’re to take the country with us then they’ve got to trust us and that’s really important too.’
Ms Powell said the Budget later this month should be about ‘putting more money back into the pockets of ordinary working people’.
She added: ‘That’s what that manifesto commitment is all about. And that’s what this Budget will be about, I’m sure.
‘It’s really important we stand by the promises that we were elected on and that we do what we said we would do.’
Ms Powell was sacked from Sir Keir Starmer’s Cabinet in September as the Prime Minister frantically reshuffled his ministers after Angela Rayner quit.
She won the race to succeed Ms Rayner as Labour deputy leader last month after a campaign based on a call for the party to change course.
Housing Secretary Steve Reed on Friday pushed back at Ms Powell’s comments.
He told LBC: ‘We’re not damaging trust in politics. We’re getting on and delivering the manifesto. That’s important.
‘But Rachel the Chancellor gave a speech a couple of days ago in which she said, we’re not going back to austerity. We will invest.’
A spokesman for Ms Powell said she would continue to support the Chancellor.
‘As Lucy made clear in the interview the Chancellor and Prime Minister make decisions on the Budget in the round,’ they said.
‘As the Chancellor said this week, the context for this Budget is particularly difficult and Lucy will continue to support them on these issues.’
