UK FISCAL: Times report income tax hike in Reeves' plans to OBR: Implications
Nov-07 08:48
- The Times reported last night that in the Chancellor's first set of Budget policies she has submitted to the OBR to be costed includes an increase in income tax. See the full report here.
- The paper reports that there will be a 2p increase in income tax and seems to imply this will apply to all rates i.e. increase basic rate from 20% to 22% higher rate (starting just above GBP50k) from 40% to 42% and additional rate (starting around GBP125k) from 45% to 47%. This would be accompanied by a National Insurance cut aligned to the basic rate band of 2%.
- Effectively this means that "working people" using the definition internal Treasury documents seen by Sky News of those with incomes up to around GBP45k will not see increases in tax from employment. But there will be increases in tax for unearned income (e.g. rental income) and pensioners. This is along the lines of the Resolution Foundation's plans.
- The story notes that these measures would raise around GBP6bln per year. However, on previous calculations from the Treasury this would just be the basic rate revenue. When including higher and additional rate taxes the plans could raise around GBP10.5-11.0bln.
- We note that any increase in income tax is likely to depress consumption next year and the impacts of this would be much more front-loaded than other potential policies (such as freezing tax thresholds for longer). We do think this is partially in market pricing, but not completely at this point. And any squeezing of real incomes further may enable more cuts from the MPC in 2026.
- Note that the OBR will be costing these policies (and others submitted by the Treasury) at present and sending updated fiscal forecasts to Chancellor Rachel Reeves on Monday. There is still time for plans to change - but this is another ratcheting up in the possibility of income tax increases.
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