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Rachel Reeves There is pressure to break Labour’s manifesto pledge with a tax raid on the highest earners amid growing demands from within Labor To attack the rich.
Ministry sources have said Independent There has been discussion within the government on changing the top rate of income tax chancellor keeps looking for ways to fill budget black hole Estimated to be between £30bn and £40bn.
The change would exceed the 1p increase in income tax that Ms Reeves is also considering.
One source said: “The 45p rate is definitely in play. It would be a popular move within the party.”
The 45p rate is applied at 45 per cent on incomes above £125,140, and is expected to be paid by more than 1.2 million people by the end of the year.
The move would break a manifesto pledge not to increase employee contributions on income tax, VAT or National Insurance.
However, another source said: “Rachel is in trouble. If we were going to break this manifesto pledge but it was targeted at the highest earners, I think that would be understandable.”
Speculation grew earlier this month that the government was set to abandon its manifesto promise, when the PM’s spokesperson indicated that the manifesto promise not to raise income tax might not stand.
Asked whether there might be increases in income tax, VAT or National Insurance in the Budget, the PM’s spokesman said: “I’m not going to speculate on the Budget, but as the Chancellor said today, the numbers will always increase.”
However, after the claims Guardian Manifesto pledges can usually be broken, with Cabinet Office minister Nick Thomas-Symonds insisting on Friday that the manifesto pledge still stands.
But according to sources, the changes could include increasing the rate by 45p, or reducing the range where it starts from £125,140 to around £100,000.
This will hit the so-called Henrys – those who are higher earners but not yet rich – who are already impacted by the tax and benefits system.
On earnings of £100,000, benefits such as child care support are lost. At the same time the £12,570 personal allowance is being gradually reduced by £2 for every £100,000 of income tax-free income, where it is lost entirely when the 45p rate is introduced.
Some people reduce their earnings by putting money into pension funds to bring them under the limits where tax and benefits penalties apply, but Ms Reeves is understood to be considering closing this loophole too.
Independent It was revealed this month The cabinet has been divided With disagreements over the budget, the “tax on aspiration” including VAT on private school fees, and the abolition of non-dom status, millionaires are leaving the UK in record numbers.
A cabinet minister told Independent: “We don’t get a chance to say much on tax. The discussion has been very limited and confined to the treasury, but there needs to be an opportunity for more input.”
It is understood there are “serious concerns” about Ms Reeves trying to plug the budget gap with “a basket of taxes” by increasing income tax, while other ministers want to see spending cuts, particularly on welfare.
Meanwhile, pressure has increased on Ms Reeves from the party’s left wing to take on the rich and big corporations. Sacked leftist cabinet minister Lucy Powell By Labor members as deputy leader.
But experts have warned that changing the top rate of income tax will not lead to as much increase as Labor hopes.
Isaac Delestre, senior research economist at the Institute for Fiscal Studies (IFS), said: “A 1p increase in the additional rate gives you about £200m, which is not a huge amount.”
He also warned that gradual cuts to the starting income tax-free personal allowance of £12,570 would make problems already creating worse.
“Lowering the threshold at which it starts to apply is slightly more problematic. Reducing the personal allowance currently effectively creates a 60 per cent income tax rate for incomes between £100k and £125k.
“If you reduced the additional rate cap to, say, £110k, you would get a 40 per cent rate up to £100k, a 60 per cent rate up to £110k, a 67.5 per cent rate up to £125k, and then a 45 per cent rate beyond that.”
Professor Stephen Millard, deputy director of macroeconomics at the National Institute of Economic and Social Research (NIESR), said: “According to the Government’s calculations, a 5p increase in the 45p top rate would only raise around £1bn by 2029-30.
“Reducing all key allowances, starting and basic rate caps by 1 per cent would lead to an increase of around £2bn.”
Tax expert Dan Needle was also skeptical about the impact of the move.
He said: “The 45p rate is right at the point where diminishing returns are coming in. No one was really able to determine whether the old 50p rate raised some money or lost some money.”
He warned that the loss of personal allowances when people reach a certain income level is leading to very high tax rates of more than 60 per cent and warned that the Chancellor should focus more on tackling that problem.
“The real cost would be between £100,000 and £125,000, dealing with unusually high rates of more than 62 per cent,” he said.
The Chancellor had to deny claims she was considering raising VAT during the Labor Party conference late last month.
However, it is also understood to be considering changes to the gambling tax and capital gains tax. Labor MPs are also pressuring him to consider a wealth tax on property and other assets.
The Chancellor has been hit by poor growth and higher-than-expected inflation ahead of the crucial Budget on November 26.
Asked about possible changes to income tax for the highest earners, a Treasury spokesperson said: “The Chancellor has been clear that in the Budget she will strike the right balance between making sure we have enough money to fund our public services, while also ensuring we can bring growth and investment into businesses.”