Rachel Reeves's income tax raid could cost pensioners £1,000 a year - how to fight back

Rachel Reeves laid the groundwork for it yesterday, in the way she knows best, by blaming everybody else for the rotten mistakes she's made. Last year's Budget was a complete disaster, as she hiked taxes by £40billion and borrowed another £30billion, and still ran out of money. So she's coming back for more.

She's likely to attack our pensions, savings, inheritances and homes, but that still won't be enough to balance the books. So it looks she'll break a manifesto promise as well, and hike income tax. Possibly by as much as 2p in the pound.

During the election, Labour pledged not to raise rates of income tax, national insurance or VAT, but with the Treasury facing a shortfall of £30billion or more, Reeves may have to raise one of those, and possible all three.

Tom Selby, director of public policy at AJ Bell, said Reeves is "playing mental gymnastics" as she tries to balance the books without shredding the manifesto. "This contortionist act now appears to be circling the idea of adding 2p to the basic rate of income tax while cutting 2p from national insurance (NI)."

Reeves could then claim to be protecting "working people" because the NI cut would cancel out the hit for employees. A 2p NI switch would raise around £12billion.

Retirees, though, would lose out, as they don't pay NI. Today, nine million pensioners already pay income tax and soon they could pay even more.

If Reeves acts, someone on a £35,000 retirement income could pay around £450 more tax, rising to £650 for someone on £45,000.

A better-off pensioner on £65,000 would pay an extra £1,000 a year in income tax, AJ Bell reckons. That's on top of everything else she does.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said income tax is the "most feared" Budget change, with one in four higher-rate taxpayers dreading a hike. "It would hit pay packets hard and add hundreds of pounds to annual bills."

If Reeves hiked income tax by just 1p, she'd raise £10billion, or £20billion for a 2p in the pound hike.

Even if she doesn't act, Coles said people will still pay more thanks to the long-running freeze on tax thresholds, which currently runs to 2028.

If she extends that to 2030 in the Budget, someone earning £51,000 could pay £1,530 extra tax simply because their pay rises pull them into a higher bracket.

Whichever path she chooses, the direction of travel is clear but taxpayers can still act to soften the blow.

Making extra contributions to a pension or self-invested personal pension (SIPP) is one of the simplest ways to reduce your taxable income, Coles said.

It could keep you below a tax threshold while boosting your long-term savings, with tax relief at your highest rate making every pound go further.

Savers can also make full use of their ISA allowances, since interest and dividends inside an ISA are tax-free.

Couples can share income-producing assets to make the most of both partners' allowances, while those approaching retirement might consider deferring income to a later tax year if they expect to fall into a lower band.

Coles added that planning early matters more than ever: "It makes sense to think ahead. Use your pensions and ISAs wisely, and make sure your savings and investments are working as tax-efficiently as possible."