Income tax rise could cost average earners hundreds per year as Labour faces budget crunch

The Chancellor has openly hinted at an incoming increase to income tax, signalling a decisive shift in the government’s approach to tackling the UK’s fiscal deficit. Following her speech at Downing Street, speculation is mounting that Labour may break its manifesto pledge and raise the basic rate of income tax, potentially affecting millions of employees and pensioners nationwide.

Analysis by accountancy firm Blick Rothenberg demonstrates that lifting the basic rate of income tax from 20 to 21 per cent would result in someone earning the UK average salary of £35,000 paying an extra £226 annually. For higher and additional rate taxpayers this figure climbs to £377. Should the rate rise by two percentage points, the annual cost to an average earner would hit £450, while those on higher incomes would see an extra £754 deducted from their take-home pay each year.

With tax thresholds frozen since 2021, many have already felt the squeeze of fiscal drag as wage increases push more people into higher tax brackets. This means even modest tax rises could have outsized effects, compounding pressures already placed on middle earners by rising living costs and stagnant wage growth.

For those on £60,000, a one point hike drops take-home pay by £377 a year, while at £100,000 a year, the loss would be £377 per point. Blick Rothenberg’s figures show that with a two point increase, a £35,000 earner would take home £28,271 instead of £28,721. Someone on £60,000 would see their pay after tax fall from £45,361 to £44,607, and for those at £100,000, take-home pay would sink by over £750 for the year.

Pensioners and landlords could be especially exposed if proposals flagged by the Resolution Foundation are adopted. This think tank recommends raising income tax but lowering employee National Insurance contributions, thereby sparing most workers but not those with other income sources. A pensioner with income of £27,500 could be nearly £300 worse off yearly if the basic rate moves up by two points. HM Revenue & Customs estimates that over 8 million pensioners already pay income tax, with a notable portion at higher rates due to the frozen thresholds.

The Chancellor’s remarks underscore the scale of the fiscal challenge ahead. With economic growth flatlining and public borrowing costs on the rise, income tax increases appear to be the least politically damaging short-term solution for plugging the public finances. For UK households, this means autumn’s Budget could deliver a significant blow to disposable incomes, regardless of political pledges made prior to the election.