LONDON: UK Chancellor of the Exchequer Rachel Reeves can raise £6bil (US$8bil) of income tax without hurting employees by aiming increases at pensioners, landlords and the self-employed, according to an influential think tank.
In an analysis published ahead of the Nov 26 budget, the Resolution Foundation proposed cutting employee national insurance, a payroll tax, by two percentage points and raising the basic rate of income tax by the same amount.
The switch would protect employees by shifting the burden onto those who only pay income tax and bring the United Kingdom closer to aligning the two rates.
Adopting such a proposal would be politically explosive as Labour came to power last year promising not to raise rates of personal taxation.
It would make Reeves the first British chancellor to increase the basic income tax rate in 50 years.
At the same time, she could claim that Labour is still honouring its commitment to spare "working people" as employees would be no worse off.
The recommendation is particularly significant because former Resolution Foundation staff now hold senior positions at the Treasury.
Torsten Bell, former chief executive of the think tank, will help lead the budget preparations as a co-chair of the budget board in 10 Downing Street with Prime Minister Keir Starmer's economic adviser Minouche Shafik.
Bell is minister for pensions and parliamentary secretary for the Treasury.
His former Resolution colleague, Dan Tomlinson, is now exchequer secretary to the Treasury.
Reeves is running out of options after a series of policy U-turns, spiking borrowing costs and an expected productivity downgrade by the Office for Budget Responsibility left her with a black hole in the public finances.
Bloomberg Economics reckons she will have to raise taxes by as much as £35bil to restore the narrow £9.9bil headroom she had in March against her main fiscal rule.
Reeves has also angered businesses and consumers alike by raising employer national insurance contributions in her first budget last year.
Business owners, economists and interest-rate setters have blamed that policy for stifling spending, costing jobs and pushing up inflation to its highest level since early 2024.
"Any tax rises are likely to be painful but given the fallout from the recent employer national insurance rise, the chancellor should do all she can to avoid loading further pain onto workers' pay packets," said Adam Corlett, principal economist at the Resolution Foundation.
"These sensible reforms would raise revenue while doing the least possible harm to workers and the wider economy."
Those on incomes from self-employment, rental properties and pensions currently enjoy lower tax rates than employees, who pay both income tax and national insurance contributions.
The Resolution proposals would continue efforts by the former Conservative government to phase out national insurance contributions.
The two-point switch would align tax rates for those with earnings over £50,271, regardless of income source.
Resolution economists also put forward a proposal to remove a tax break by extending national insurance to partnership income - the kind earned by lawyers, accountants and financiers, and increase taxes on dividends to raise an additional £2.5bil a year.
Lowering the threshold for paying value-added tax to £30,000 over time would bring in an extra £2bil, the report said.
Resolution argued that the current allowance of £90,000 - twice the OECD average - encourages firms to "punch just below it", effectively acting as a speed limit for growth.
Another £3.5bil could come from a new tax on salt and sugar applied at industry level, which would be similar to the current soft drinks levy.
Such a tax is likely to fuel worries of higher food inflation as food manufacturers are already warning that regulatory and fiscal costs will accelerate annual price increases to 6% by the end of this year. -- Bloomberg