Rachel Reeves 'to hike UK's biggest tax' - and she thinks we won't notice

Stephen Millard, acting director at the National Institute of Economic and Social Research, has warned the Chancellor is likely to break Labour's manifesto pledge not to raise one of the "big three" taxes: income tax, National Insurance or VAT.

It's the only way to raise the huge sums required.

Millard said "it is pretty much inevitable" one of these will rise.

Reeves is now under fresh pressure, with her £9.9billion of fiscal headroom eroded by Donald Trump's tariffs and her own growth-sapping policies.

So which big three tax will she hike?

VAT looks unlikely to me. Any increase would drive up shop prices and risk reigniting inflation. It would hit voters directly, and there'd be no hiding from the backlash. VAT can raise fortunes, but it can destroy political ones.

National Insurance (NI), on the other hand, is a possibility.

Former Tory Chancellor Jeremy Hunt pulled a crafty stunt before the election, slashing employee NI from 12% to 10%, then again to 8%.

This cost the Treasury £20billion a year, and Hunt calculated Reeves would be forced to reverse at least one of them, taking the political flak.

So far, she hasn't.

Instead, the Chancellor plugged the gap by hiking employers' NI by £25billion from April. She insisted this didn't break a manifesto pledge, even though the cost was passed on to working people through lower wages, higher prices and fewer jobs.

The backlash will may make her cautious about touching NI again, especially directly on working people.

That leaves only income tax.

It's the biggest tax of all, forecast to raise more than £330billion this financial year, more than a quarter of all receipts.

Allan Monks, chief UK economist at JP Morgan, thinks this is the one Reeves will target, by extending the freeze on income tax thresholds from 2028 to 2030.

She was rumoured to be considering this in last year's Budget, but opted for the employers' NI hike instead.

Why do it? Because it's a classic Treasury stealth tax. Most won't feel the impact until the 2028/29 tax year.

The Institute for Fiscal Studies estimates the current freeze will already push four million people into paying more income tax by 2028, via fiscal drag.

An extension would drag another 400,000 into paying income tax for the first time, and 600,000 more into higher tax bands.

A typical worker could end up paying £324 extra more each year by the end of the decade.

Pensioners will also be hit. As the state pension rises but the £12,570 personal allowance remains frozen, millions more will pay tax on their state pension.

With defence spending set to rise and Labour activists blocking spending cuts, Reeves may have no choice.

She was rumoured to be extending the income tax freeze in last autumn's Budget, before losing her nerve.

This time, she may go for it.

Reeves could claim this isn't a tax hike, as the headline rate of income tax won't change. She'll claim she's sticking to the manifesto, when she isn't.

She'll hope voters don't notice. They will.