Labour Manifesto – Can Reeves stick to it?

It has been speculated that Rachel Reeves is considering breaking the Labour Manifesto pledge with income tax rises; two tax partners share their thoughts

Daniel Lewin, Tax partner at law firm Katten Muchin Rosenman UK LLP, says:

“The difficulty starts with the manifesto pledge. Promising not to raise income tax, National Insurance contributions and VAT for “working people” effectively meant ruling out increasing the three main taxes that genuinely move the economic needle of the UK’s public finances.  Against this background, it feels like the Chancellor is throwing out proposals to see which ones create the least backlash while working out which combination gets her closest to filling the multi-£bn “black hole” the UK public finances face – without breaching the manifesto, unless perhaps the manifesto is now breached.

The latest rumour – that the Treasury is considering raising the income tax rate by 1 p, although it is not clear whether this would be the basic rate (the real revenue generator), or just the higher and additional rate – would probably only genuinely help the public finances if it is some form of basic rate increase.  It would be a cleaner solution compared to other ideas like the introduction of a mansion tax but also an indisputable manifesto breach which is already stretched while Labour is struggling to hang on to public support.  Thought would need to be given how to protect those that would be most affected. The problem is that the alternatives suggested – such as the imposition of 15% National Insurance contributions on the profits of partners of UK LLPs (particularly, lawyers and accountants – mostly ignoring other business sectors that also operate under the LLP structure such as asset managers that have already been hit by the non-dom and carried interest changes) – will raise some revenue, but also further damage UK PLC as a destination for talent and economic growth. The highest marginal tax rate for partners would increase to around 54%. This will not be the way to help the economy grow.  For some sectors such as GPs who are not the highest earners, it would also be hard to argue that they are not hit by a significant manifesto breach.”

Bina Gayadien, Tax partner at law firm Spencer West LLP, comments:

“With all the speculation around November’s Autumn Statement, one thing feels certain: tax rises are coming. Whether through direct tax rate increases or more structural reforms to the tax system, the Chancellor will need to find billions from somewhere without breaching Labour’s manifesto pledges. A number of possible changes are being suggested but their broad impact means that the Chancellor will need to tread carefully.

One area under review is the tax-free lump sum that can be taken from UK pension pots. Currently, individuals can access up to 25% of their pension savings tax fee from the age of 55, rising to 57 from 6 April 2028. The maximum tax-free amount was capped at £268.275 from 6 April 2024. We may see this cap reduced further, the minimum age at which the lump sum can be taken further increased, or other changes introduced to limit the tax relief on pension withdrawals or contributions. The lifetime and annual allowances already restrict what higher earners can contribute tax free to their pension, and any further limit to tax relief on pensions are not anticipated at this stage, as that would directly impact workers.

Another consideration which has also been suggested,  is the removal of National Insurance Contributions (NICs) savings from salary sacrifice arrangements for pensions. Currently, employer pension contributions made under salary sacrifice are exempt from employer NICs and abolishing the relief would increase employer’s costs.

The Chancellor is also said to be considering applying employer National Insurance Contributions to payments made to members of LLP. These individuals are not employees but considered self-employed and therefore no employer NICs are due. LLP structures, already subject to complex anti – avoidance rules, are commonly used by professionals such as lawyers, fund managers and accountants but also medical practitioners. These measures may not be presented as ’tax increases’ for working people, but there will be a knock-on effect on the net pay and benefits of workers as we have already seen following the increase of employers’ NICs from 6 April 2025.

If Rachel Reeves would be willing to revisit Labour’s manifesto pledges on tax, a 1% increase of the basic rate from 20 to 21% would have broad implications and it has been estimated this could potentially raise 8 billion in tax revenue. Such a raise is seen as a big ‘political gamble’ as the economic impact and the response to these changes will be difficult to predict.

Rachel Reeves is running out of options to raise revenue without directly tax increases. The proposals which are being suggested are likely going to impact on workers, employers and professionals across the board. None of the suggested changes would make enough impact to raise sufficient revenue to fill the fiscal gap but almost all come with complex trade-off.”