Budget 2025 predictions: Potential 1% hike in Basic Rate of Income Tax

The Basic Rate of Income Tax has been set at 20% for as long as many of us can remember. In fact, it was reduced by Labour’s then Chancellor, Gordon Brown, from 22% down to 20% back in 2008. He also did away with the Starting Rate of 10% so the tax rate cut was not as generous as it first seemed.

Interestingly, if we go back in time far enough, the Basic Rate used to be 25%. Am I therefore surprised that the Government are now considering a 1% hike in the rate, from 20% to 21%? No, I am not.

Putting aside the fact that not raising Income Tax was one of the Labour Party’s manifesto pledges, and going back on this would be a breach of the public’s trust, what other method does the Chancellor have of raising sufficient tax revenues to plug the massive black hole in the country’s finances?

The proposed increase is expected to raise an additional £8bn a year in extra tax. It would certainly be easier to implement than say an equivalent to employer’s National Insurance contributions on profits earned by partners in an LLP or traditional partnership (a topic that we discussed last week).

One alternative may be to raise corporation tax rates again, the last increase being in 2023 when the rate jumped from 19% to 25% for all but the smallest of companies. That move, like any major tax increase, was not popular. In fact, it resulted in many businesses, especially multinational corporations, either looking to exit the UK in favour of lower tax jurisdictions or to think twice about investing here in the first place.

This, coupled with the reduction in tax incentives such as the R&D tax credit, has seen investment in the UK start to dry up, as evidenced by our stagnating economy. The last thing we therefore need is a further increase in the corporation tax rate.

Whilst an increase in the Basic Rate of Income Tax will be hugely unpopular, it is largely unavoidable by the majority of the tax-paying public – it affects pretty much everyone!

There is always the option instead to increase the Additional Rate of Income Tax from 45% to say 50% again, but this will only affect a small proportion of the populace and not bring in nearly as much tax revenue as the public perceives. In addition, many of those that would be affected by such an increase are able to arrange their affairs to mitigate their exposure or even leave the country altogether.

The Chancellor faces an impossible task, one which I do not envy. Time is ticking away to find a suitable solution, but we are all convinced that half-measures would do nothing to fix the problem. One of the big three taxes of Income Tax, National Insurance and VAT will very likely be subject to an increase. The question is, which one will it be?