Investing Insiders Blog: Labour considering raising income tax

Labour is reportedly considering breaking its manifesto pledge and raising income tax to help plug a £30bn hole in the public finances, according to sources who spoke to The Guardian.

The party is reportedly considering a 1p rise to the basic rate, which would raise around £8bn. It could consider taxing higher or additional rates of income tax instead, but this would reportedly raise lower amounts of £2bn and £230m, respectively.

https://www.theguardian.com/money/2025/oct/23/rachel-reeves-is-considering-raising-income-tax-to-reduce-deficit-sources-say

Laura Purkess, personal finance expert at Investing Insiders, said: “The fact Labour is seriously considering an income tax rise shows how dire the numbers must really be.

“It’s a political nightmare for the party and would be a constant point-scorer for the opposition and Reform, which will relish in them U-turning on another manifesto pledge.

“Labour are probably kicking themselves for ever promising not to raise income tax, given a 1p rise would reportedly raise around £8bn immediately. That’s nothing to sniff at when the finances are in such a poor state.

“If the party raised higher rates of tax, it would be less damaging politically, but would raise a lot less money.

“Political point scoring aside, it’s regular people who will really feel the impact of this. A tax rise right now will pile further pressure on household finances that are already seriously squeezed from all angles, piling further pressure on household finances that are already seriously squeezed from all angles.

“Many families don’t have anything extra to spare, and will have to make more cuts to their living standards to accommodate this.

“That can cause people to neglect other important financial decisions, such as creating or updating a will, setting up a retirement plan, or putting protection policies in place for ill health or loss of their income.

“Taking more money from people’s purses right now will also reduce spending and damage their confidence to invest – something Labour has been increasingly pushing for – which would have a knock on the wider economy.

“Unfortunately, it looks like Labour is in a real pickle, so if they do decide to stick to their manifesto pledge, we can probably expect a number of other levers being pulled to make up for it.”

When your salary increases, it can suddenly feel like you have loads of free cash at the end of the month. But in some cases, your salary may rise a significant amount – but you end up with less of it than you expected.

This may be because you’ve crossed over into a higher tax bracket, which means a higher rate of tax is charged on any income over a certain amount. That means more of your money is going to tax, and less into your pocket.

Once you start earning above £50,270, every pound over that amount is charged at 40% tax. Over £125,140, it’s charged at 45%.

Many people are also stung around the £100,000 mark, as you lose a lot of tax benefits when you earn over this amount.

For example, your personal allowance – the amount you earn without paying tax – starts to reduce. For every £2 you earn over £100,000, your personal allowance is reduced by £1. You also lose tax-free childcare and other free childcare hours.

How to take home more of your money

One of the best ways to keep more of your income as a higher earner is to redirect more of your earnings into your pension. Money put into your pension is tax-free, so you get to keep the extra rather than giving it to HMRC.

Be aware that the current standard annual allowance – the amount you can put into your pension each year – is £60,000, but it can be lower for high earners. However, you can ‘carry forward’ any unused allowance from the three previous tax years if you need to put a lot away in one year. 

If you’re trying to avoid the ‘£100k tax trap’, you could also consider making charitable donations to bring your salary down below this threshold. This means you’ll keep your personal allowance and childcare benefits.

Charitable donations through Gift Aid extend your basic rate tax band, reducing your higher-rate exposure. For example, a £1,000 donation could increase your basic rate band by £1,250.

Saving your money into an ISA can help you keep more of your savings. Interest or returns earned inside an ISA are tax-free, so you get to keep every penny.