How much would an income tax rise cost you?

If the rumours are true, Chancellor Rachel Reeves could break her promise and raise income tax in the Autumn Budget. But how much worse off could some people be?

While we won't know exactly what the government has in store until the fiscal plan is unveiled on 26 November, national newspapers are reporting that the basic rate of income tax could go up by 2p.

We've taken a closer look at what a raid on income tax could mean for our pockets and who would be hit the hardest.

How much income tax do we pay?

You pay income tax on the part of your income above the personal allowance, which is currently £12,570. If you live in England, Wales or Northern Ireland, the rate you pay is divided into three bands:

• 20% basic-rate: £12,570 to £50,270.
• 40% higher-rate: £50,271 to £125,140.
• 45% additional-rate: more than £125,140.

There are different tax bands and rates in Scotland.

Regardless of where you live in the UK, your personal allowance will be reduced by £1 for every £2 you earn over £100,000. This means that by the time you earn £125,140, you'll have to pay income tax on all of your income.

• Find out more: UK income tax rates 2025-26 and 2024-25.

How might income tax go up?

The government has been struggling to balance the books since it came to power last year, but the Chancellor promised that income tax and National Insurance (NI) for 'working people' were safe from any increases.

However, reports now suggest that a hike in income tax rates is being considered after all. Two main options are being talked about in the national press:

• 2 up, 2 down: There are rumours of a 2p rise in the basic rate of income tax offset by an equivalent cut to NI. The biggest losers would be pensioners and landlords, who don’t currently pay NI.
• Extend the threshold freeze: Income tax thresholds, which determine how much you can earn before moving into a higher tax band, are frozen until 2028. Continuing the freeze for another year would bring in an additional £10bn for the government. That's because, as wages rise, more people start paying higher rates even though the tax bands themselves haven’t changed.

Find out more: income tax calculator.

What would a 2p rise cost you?

Let's take a closer look at the first scenario, which involves adding an extra 2p onto the basic rate of income tax. In other words, raising it from 20% to 22%.

There are some compelling reasons why the Chancellor might do this. Think tank the National Institute of Economic and Social Research says that this is the minimum needed to repair Britain’s public finances, raising around an extra £20bn.

If NI was cut by an equivalent amount, then Reeves could also still claim to be protecting the pay packets of ‘working people’. That's because it would effectively cancel out the impact for employees. 

Pensioners and landlords, however, aren't subject to NI and would be squeezed the most under the plans. 

Investment firm AJ Bell has crunched the numbers to find out how much more this group of taxpayers stands to pay if the rate hike goes ahead:

It's possible the government could also apply a 2p increase to higher-rate and additional-rate taxpayers. But Laura Suter, AJ Bell's director of personal finance, has her doubts about that idea.

She says: 'While it’s possible that income tax rates could be hiked across the board, higher and additional-rate taxpayers already account for a disproportionate share of the income tax take. What’s more, increasingly aggressive rates risk discouraging people from taking promotions and progressing their career.' 

• Find out more: how much tax you pay.

What if you're self-employed?

There's still a big question mark over how an income tax and NI shake-up would impact self-employed workers. This group currently pay NI at a rate of 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. Employees, on the other hand, pay 8% and 2%.  

If the Chancellor chooses not to cut NI rates for the self-employed, people who work for themselves would also end up paying more to HMRC.

• Find out more: self-employed income tax, National Insurance and VAT.

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4 ways to lower your tax bill

If you have found yourself pushed into a higher tax bracket, there are a few things you can do to reduce your bill to HMRC.

1. Invest in tax-free savings

You can put up to £20,000 in a cash and/or stocks and shares Isa, and any income generated can grow completely tax-free, protecting your savings now and in the future.

You can also hold up to £50,000 tax-free in premium bonds, and every month you'll be entered into a prize draw with a chance of winning anything from £25 to £1m.

However, it's rumoured that the £20,000 tax-free allowance for cash Isas could be cut in the Autumn Budget. It's hoped that the move will nudge more savers towards investing. 

• Find out more: best cash Isa rates 2025.

2. Pay more into your pension

One of the most common ways to reduce income tax is by contributing to a workplace or personal pension scheme. For example, a basic-rate taxpayer will get 20% tax relief on the money they put into the pension pot. So if you pay in £100, it would actually only cost you £80. 

It’s a little more complex if you're a higher or additional-rate taxpayer. Your provider will claim the basic rate of 20% tax relief for you, but you'll have to claim the remainder (20% for higher rate or 25% for additional rate) by filing a self-assessment tax return.

For example, if you earn £60,000 per year, you will be in the higher-rate band. By contributing £10,000 to your pension, you'll get 20% (£2,000) relief automatically and you can claim another 20% in your tax return. As a result, the total cost to you will work out at just £6,000.

• Find out more: tax relief on pension contributions explained.

3. Use your dividend allowance

If you're self-employed and own a limited company, it can be more tax-efficient to pay your income in the form of dividends. Not only do they attract lower rates of income tax than salary, but there are also no NI contributions payable on dividends.

For example, the basic rate of income tax on dividends is just 8.75%, with the higher rate at 33.75% and the additional rate at 39.35%.

There are a number of disadvantages to this, however. Dividends can only be paid out of profits after corporation tax has been deducted (unlike salaries, which are tax-deductible expenses). Plus, they don’t count as ‘relevant UK earnings’ for the purposes of tax relief on pension contributions that you make yourself.

• Find out more: dividend tax explained.

4. Share your allowances

If you're in a relationship, organising finances between you can make allowances go even further and save you more on tax. 

For example, if your partner has an unused personal savings allowance, then cash could be held in their name instead. 

Or, if one of you is a lower-rate taxpayer, it might make sense for them to have the bulk of the non-Isa savings, so you pay a lower tax rate on the savings interest.

• Find out more: tax on savings interest and investment income.