Labour ministers voice terror at Rachel Reeves's plan to hike income tax at Budget

Rachel Reeves has been warned by Cabinet colleagues not to break Labour's manifesto commitment as reports emerged she is considering a desperate emergency tax grab. The Chancellor is reportedly eyeing a stunning move to raise income tax in order to find £30billion to fill her latest fiscal black hole.

The Treasury is said to be considering adding 1p to the basic rate of income tax, which would raise around £8billion. Such a move would cost a British worker earning £35,000 over £220 a year, or £377 a year for anyone earning over £50,270. While Labour's election manifesto provided a cast-iron guarantee not to raise income tax, National Insurance or VAT, a Treasury source said: "There is a very live debate going on right now among those planning the Budget about how bold we want to be."

Sir Keir Starmer's spokesman refused to rule out the move, insisting the Government will not comment on speculation around tax ahead of the Budget.

"The choice at the Budget is clear - we can go back to the cycle of austerity, debt and decline, or we can continue to invest in Britain's renewal with an economy that works for working people," said the spokesman.

"We will always choose the latter, and as ever it's for the Chancellor to set out her Budget in Parliament next month."

A minister insisted that Labour "stand by our manifesto", though did not guarantee that the pledge would hold at the Budget.

However, a number of Cabinet ministers voiced fears that breaking the manifesto pledge would be panned by voters at a time Labour's support is already plummeting.

A minister warned there would have to be a "very, very high threshold" for abandoning the pledge.

Ms Reeves was slammed at the last Budget for giving herself just £10billion in so-called fiscal headroom, the buffer to absorb economic shocks while ensuring the country's finances still add up.

It is believed the Chancellor is determined to give herself a much larger amount of headroom at her November Budget, though this will require additional tax rises or spending cuts.

The Treasury source told The Guardian: "No one wants it to be £10billion again, but there is an argument we go much higher, which will mean we don't have to come back and do this again and might have space to cut taxes before the Budget.

"If we go down that route, however, it makes it more likely that we have to raise income tax - that is the discussion that is going on at the moment."

Responding to the reports, Paul Dales at Capital Economics warned: "It takes money away from households, it would lower their real disposable incomes, and leave them with less money to spend.

"The question is whether there would be an extra drag from any confidence effect, because it would be quite a big deal, it would get a lot of press, you might get households pulling back a little more than the [forecast models] suggest."