Workers earning more than £75,000 could pay thousands of pounds more in tax should Rachel Reeves follow an influential think tank’s proposal to raise income taxes by 2p and cut national insurance by the same percentage.
The Chancellor warned Brits that everyone will have to “contribute” to her Budget plans earlier this week, which has been interpreted as Reeves laying the groundwork for a breach of the Labour Party manifesto.
Reports have suggested that Reeves could move ahead with a simultaneous 2p increase in income tax rates and 2p decrease in national insurance as part of an effort to raise funds to fill an estimated £30bn fiscal hole without directly hitting “working people”.
The Resolution Foundation, a left-leaning economics think tank that was once the workplace of some Treasury ministers, made the proposal in late September.
Fresh analysis has suggested that such a move would disproportionately hit higher earners.
Higher earners to pay more tax
Quilter researchers said the manoeuvre would lead to earners above £75,000 paying £495 more in tax.
Earners above £100,000 would pay £998 more whereas those on annual income above £125,000 would have to cough up £1,745 more in each year.
Lower earners and those around the median wage would be protected from any change to their overall taxation levels.
Analysis by Quilter uncovered how mooted proposals, which could be unveiled at the Budget, would fail to solve the £100,000 tax trap or lessen the hit of cliff edges in tax rates paid by higher earners.
Taxpayers within the £100,000 to £125,000 income band face an effective marginal rate of 60 per cent due to the tapering away of the tax-free personal allowance.
Quilter’s model is based on the amount of national insurance paid by workers on salaries above the upper earnings limit, which is around £50,270 on an annual basis, with the additional two per cent rate remaining unchanged.
Shaun Moore, tax and financial planning expert at Quilter, said the move would be more “pragmatic” than a straight rise to income tax rates.
“It allows the Chancellor to raise significant revenue while protecting the majority of working households and maintaining the sense that manifesto commitments are being ‘bent’ rather than broken,” Moore said.
“Whatever she decides, this budget will set the tone for how much political capital Reeves is willing to spend to repair the public finances.”
In further analysis provided by Quilter, it showed that a blanket 1p rise to income tax rates would lead to earners above £100,000 paying £874 more in tax.
Lower earners on £25,000 a year would pay an additional £124 while those above £100,000 would pay £874 more a year.