Chancellor Faces £40bn Budget Black Hole
Chancellor Rachel Reeves is under growing pressure to raise taxes on Britain’s wealthiest as Labour scrambles to fill a multibillion-pound gap in the public finances. Senior government sources told The Independent that discussions are underway about changes to the top rate of income tax, with a potential increase to the 45p rate for those earning above £125,140.
The move would represent a major shift for Labour, breaking its election pledge not to raise income tax, VAT, or National Insurance. Treasury insiders estimate the shortfall in the upcoming 26 November Budget at between £30bn and £40bn, forcing the chancellor to weigh politically risky revenue options.
Reeves Weighs Top Rate Changes
Officials have reportedly discussed two key options: raising the 45p additional rate itself or lowering its threshold from £125,140 to around £100,000. Either measure would impact more than a million taxpayers, particularly professionals in the so-called “HENRY” category High Earners, Not Rich Yet.
These earners already face one of the UK’s steepest marginal tax rates. Between £100,000 and £125,140, workers lose £1 of their tax-free allowance for every £2 earned, effectively creating a 60% marginal rate before even reaching the 45% top rate.
Internal Party Divisions Emerge
Labour insiders admit the plan has split the Cabinet, with some urging Reeves to “grasp the nettle” and increase income tax to fund spending, while others favour cutting welfare instead. One minister described “serious concerns” about trying to plug the gap with “a basket of smaller taxes.”
Meanwhile, the left wing of Labour is pushing for a tougher stance on wealth, advocating taxes on property, capital gains, and corporate profits. The tension underscores the balancing act Reeves faces between fiscal realism and party unity as economic headwinds grow stronger.
Economic Experts Question Impact
Economists have cast doubt on how much extra revenue a higher top rate would actually raise. The Institute for Fiscal Studies (IFS) estimates that adding just 1p to the 45p rate would bring in around £200m far short of the tens of billions needed.
The IFS also warned that lowering the threshold would worsen distortions in the tax system, with effective rates spiking above 60% for certain income bands. “It would make an already complicated system even more punitive for middle-to-upper earners,” said IFS economist Isaac Delestre.
Calls to Reform, Not Just Raise Taxes
Tax experts say the Government should focus on reforming anomalies rather than hiking rates. Dan Neidle, of Tax Policy Associates, argued that targeting the £100,000 to £125,000 range where marginal rates already exceed 60% would deliver “real value” by simplifying and rationalising the tax structure.
Similarly, the National Institute of Economic and Social Research (NIESR) said even a 5p rise in the top rate would yield only £1bn by 2030, compared to nearly £2bn from adjusting lower thresholds. Economists agree structural reform would boost fairness and stability more effectively than politically costly rate rises.
Cabinet Split Over Alternative Tax Options
Alongside income tax, Reeves is reportedly reviewing several other potential measures, including a gambling levy, a capital gains tax overhaul, and stricter rules on partnership income for high-earning professionals. Pressure also continues to mount for a wealth tax on large property and asset holdings.
However, experts warn that many of these proposals would have only limited impact. Past experiences, such as the scrapped 50p top rate, show diminishing returns when high earners adjust behaviour or move assets offshore to avoid higher taxation.
Reeves Promises ‘Balance and Responsibility’
Amid speculation, the Treasury maintains that all options remain on the table until the Budget. A spokesperson said Reeves would “strike the right balance between funding public services and promoting economic growth.”
With borrowing costs easing slightly and inflation holding at 3.8%, the Chancellor may gain some breathing room. But as Reeves weighs whether to break one of Labour’s most defining pledges, the political and economic stakes have rarely been higher.
