All we know as Rachel Reeves 'eyes income tax rise'

Rachel Reeves is being urged to consider a 2p rise in income tax in her Autumn Budget to plug a growing hole in the public finances - in a move that could hit pensioners and landlords while sparing workers.

The Resolution Foundation, a think tank with close ties to Labour, said the Chancellor faces a £26 billion shortfall and warned that avoiding increases in the main taxes would be "doing more harm than good".

In its Autumn Budget preview, the group said Reeves should "look to make sensible tax reforms" - including overhauling taxes on cars, dividends and capital gains - but that the most effective single change would be a switch between Income Tax and National Insurance.

"Switching 2p of employee National Insurance onto Income Tax would raise £6 billion while protecting workers' wages," said James Smith, the Foundation's research director.

Such a move would leave employees' take-home pay unchanged but increase the overall burden on pensioners, landlords and others whose income is not subject to National Insurance.

The Resolution Foundation said Reeves must 'take decisive steps' in her Budget to strengthen Britain's public finances, double her room for manoeuvre to at least £20 billion, and show markets that Labour is serious about stability.

The warning comes amid expectations that the Office for Budget Responsibility will downgrade the UK's productivity outlook, effectively lowering the economy's "speed limit". That would add billions to long-term borrowing and leave Reeves with what the think tank called a "fiscal black hole of around £4 billion".

To meet her fiscal rules and still deliver on Labour's pledges to cut poverty and lower energy bills, Reeves is told she must raise taxes rather than slash spending.

The Foundation estimates that extending the freeze on tax thresholds for two more years could raise £7.5 billion, while tightening dividend and capital gains rules could generate up to £7 billion more.

But it dismissed a VAT rise as inflationary and warned that deep departmental cuts were "tough to deliver".

"Reassuring the markets, paying for policy U-turns and providing fresh cost of living support won't come cheap," said Smith. "Tax rises of £26 billion are likely to be needed. Together, this will help deliver a decisive Budget centred around prices, payslips and poverty reduction."

The Resolution Foundation also called for scrapping the two-child limit on welfare - costing £3.5 billion - and moving social and green levies off energy bills, which it said would cut typical household costs by £160 a year and trim inflation by 0.3 percentage points.

But such pledges would add pressure on Reeves as she tries to balance Labour's social promises with the need to restore fiscal credibility after years of weak growth.

Economists said the proposals underline the scale of the challenge facing the Chancellor, who is expected to deliver her Budget later this month amid warnings that any tax rises could alienate middle earners and pensioners - a key part of Labour's voter base.