Rachel Reeves is considering the nuclear option for next month’s Budget: raising income tax.

The Chancellor is said to be discussing breaking one of Labour’s manifesto pledges as she casts around for ways to raise around £30bn to repair Labour’s plans.

Although Reeves has not struggled to ramp up levies so far – a year ago she launched a record-breaking £40bn raid – even she will find it difficult to stomach an increase in income tax.

She and other ministers have promised, loudly and often, that the party will stick by its pledge not to raise income tax.

A similar vow on National Insurance contributions (NICs) was watered down a year ago, when the Government claimed that the election campaign pledges applied only to the minority of NICs paid directly by employees, not the larger share paid by employers.

Reeves hid behind the manifesto’s wording that “Labour will not increase taxes on working people” to justify the £25bn tax raid.

Pulling the same stunt on income tax is harder: it is the archetypal tax on working people.

But times are tough. The Chancellor has dug a hole and needs to get out of it somehow.

More recently, Reeves has begun signalling that her Budget will target the rich, saying those with the “broadest shoulders” must contribute.

Could she raise income tax and plausibly claim that it is targeting the wealthy rather than average workers? What are her options for income tax?

The simplest step would be to raise all income tax rates.

Adding 2p to the basic, higher, and additional rates – taking them to 22p, 42p and 47p – would raise £21bn per year.

That would solve many problems for the Chancellor. It would show debt markets that she is serious about fixing the finances. Combined with a range of smaller measures and perhaps a touch of restraint on spending, it could bolster her headroom well beyond the £9.9bn planned at the Spring Statement and at last year’s Budget.

It could also help prevent every small change in growth forecasts or interest rates from throwing the Chancellor’s plans into disarray.

But it would also make Reeves the first Chancellor in 50 years to raise the headline rate of income tax, associating her forever with a raid on everyone from workers on the minimum wage to retirees with no income beyond the basic state pension.

A worker earning £25,000 would see their tax bill rise by around £250 a year.

Someone on £60,000 – firmly into the higher rate bracket – would pay roughly an additional £950 in tax.

Another option is to pile the pain on higher tax rates, sparing those paying the basic rate, who might be called typical working people.

An extra penny on the 40pc and 45pc rates would raise £2.33bn per year, according to HMRC estimates. The higher rate kicks in when an individual earns £50,270, and the additional rate kicks in at £125,140.

Larger increases are risky – some higher earners might leave the country, stop working or seek to take their income in other forms. But if these could be avoided, then a 5p rise – taking the rates to 45pc and 50pc – might theoretically raise around £10bn per year.

Alistair Darling, the Labour chancellor under Gordon Brown, introduced a 50pc rate on incomes over £150,000 per year in 2010.

However, the taxman found that high earners shifted the timing of their earnings to avoid the 50pc rate as much as they could.

Ultimately, the Conservatives, under George Osborne, cut it to 45p, arguing that taking half of earnings “damages our economy and raises next to nothing”.

It represents a cautionary tale if Reeves seeks to soak the rich next month.

Other options exist. One that economists consider highly likely is an extension of the long freeze on income tax thresholds, which would raise an extra £10.4bn per year by 2029-30.

Since 2021-22, Britons have paid income tax once their earnings rise above £12,570 per year. Under Conservative plans, that threshold and those for higher rates are to be frozen until April 2028.

Inflation means workers end up paying tax on a rising share of their income and being pulled into higher tax brackets, as employers hand out pay rises to compensate for rising prices.

If they had risen with inflation, the basic rate would kick in at £15,480 this year and the higher rate at £62,080.

The result is more revenue for the Treasury and lower living standards for workers.

The measure is stealthy, avoiding the scrutiny and unpopularity of a headline tax rise while raising substantial sums, given the intensity of inflation in recent years.

Annual income tax receipts are already on course to double from £192.5bn per year at the start of this decade to £398.1bn by the end, with close to £50bn of that coming from the threshold freezes.

One downside of extending the freeze is that it takes time to raise revenues. There is no immediate gain for the Treasury, though it will improve the forecasts.

The Institute for Fiscal Studies has noted that this would also break the manifesto pledge not to raise income tax.

Alternatively, the Resolution Foundation has proposed adding 2p to income tax while offsetting the same amount by reducing employees’ National Insurance contributions, to raise an estimated £6bn per year.

This is designed to avoid making most employees worse off, thus seeking to avert claims that the Government has broken its promise not to hammer “working people”.

Instead, it would hit those who do not pay employee NICs but do pay income tax.

This includes most pensioners, landlords and the self-employed, who might object to the idea that they are not “working people”.

For now, Treasury sources insist Labour’s manifesto pledge not to raise income tax, VAT or National Insurance still stands. But the odds of that holding come Nov 26 are getting longer by the day.

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