The Treasury has drafted a range of options to help with the cost of living crisis, including a 1 pence cut in income tax, an increase in the national insurance threshold and a significant cut in fuel taxes.
But government sources said Chancellor Rishi Sunak was still reluctant to make major fiscal changes.
Sunak is under immense pressure from Conservative MPs to help households struggling with high gasoline prices and inflation when he delivers spring statements on Wednesday.
Options under consideration by the Treasury include a promised 1 pence cut in the basic income tax rate, possibly in the fall budget or next year, which would largely offset the rise in national insurance.
Sunak could also map out a way to raise the national insurance threshold to the same rate as income tax, from £9,600 to £12,750 – a pledge of the Tory manifesto.
He has also considered a fuel tax cut, with Labor backing a cut to 5p in response to rising fuel prices and a coordinated campaign by some Tory MPs.
Labor has also called for a windfall tax on fossil fuel companies that benefit from high global oil and gas prices, which Sunak has so far resisted.
However, some Tory backbenchers think there is still some room for him to turn this around, as the Russian invasion of Ukraine has changed the economic picture and caused a price hike.
On Friday, Sunak dropped a heavy hint that he will try to help with the cost of living, but also stressed that there are some things the government cannot change and emphasized “global inflationary forces”.
A source from the Treasury Department said a cut in income tax was still the source of “internal negotiations” but confirmed the topic was under discussion. Sunak said on Friday the tax increases were “done” and indicated he wanted to cut taxes before the next election.
But another official said Sunak was still resisting major interventions or pledges before the fall. “He has literally been ‘car-no’ to everything being suggested,” the source said.
A fuel tax cut would be enthusiastically welcomed by many conservative conservatives, but some campaigners are warning against it. Analysis by the New Economics Foundation (Nef) shows that only 7% of benefits go to the poorest fifth of households.
The Russian invasion of Ukraine has put additional pressure on Sunak to lower the cost of living in Britain. The Bank of England has said inflation could hit 10% later this year and it can’t stop rising energy prices from making people poorer, leaving it to the chancellor to act.
The independent Office for Budget Responsibility is likely to give Sunak room to act when it releases new government finance forecasts on Wednesday.
Lower-than-expected unemployment means the OBR will lower its estimate of the long-term damage from the pandemic, while higher inflation has increased the amount of money Sunak will get from freezing tax breaks.
The Institute for Fiscal Studies said this week that the Treasury had expected to receive £8 billion a year from the move, but in reality would receive £20.5 billion.