Rachel Reeves has been told to break a key Labour election promise and hit top earners with a 10p income tax rise to plug a massive black hole in the nation’s finances.

A leading economic think tank warned the Chancellor may have no choice but to raise the higher rate of income tax from 40% to 50%, while also lifting the basic rate from 20% to 22% to show markets she has “a credible plan” to stabilise Britain’s debt.

The National Institute of Economic and Social Research (NIESR) said such a move would cause less damage to growth than a series of smaller tax rises or hikes to other major levies.

But it would breach Labour’s manifesto commitment not to raise income tax, National Insurance, VAT or corporation tax – a promise central to the party’s pitch at the general election.

At present, income tax is charged at 20% for most earners, rising to 40% above £50,270 and 45% for those on more than £125,140. In Scotland, rates range from 19% to 48%.

NIESR director David Aikman said the situation was so dire that Ms Reeves had to act decisively – or risk a market backlash reminiscent of the Liz Truss “mini-Budget” turmoil.

“The risk is that markets react badly to whatever comes out in the Budget later this month – and rather than the credibility dividend that we could see happening, we see the opposite, something more like the Liz Truss moment,” he said.

He added that large tax rises may be unavoidable to convince investors that Britain has a “credible plan” to bring debt under control.

The warning came after Ms Reeves signalled that tax rises were on the table, saying this week:

“We will all have to contribute” to repairing Britain’s finances.

NIESR deputy director Stephen Millard estimated that a 2p rise in the basic rate would raise around £20 billion, while adding 10p to the higher rate could bring in £15 billion.

He said such a move could even appeal politically to the Government: “Given that she is a Labour Chancellor and she has made points about ‘working people’ and the £46,000 per year definition of a working person, then it is quite likely we will see a larger increase on that 40% rate than on the basic rate,” he said.

The NIESR call came as more than half a dozen think tanks urged Ms Reeves to tackle what they described as “absurd” penalties on parents earning just over £100,000, who lose all access to childcare support.

A report by the Centre for the Analysis of Taxation (CenTax) – co-authored with the Institute for Public Policy Research (IPPR) and the Centre for Policy Studies (CPS) – said the current system “discourages people from earning more.”

It also suggested merging income tax and National Insurance, a radical move that would bring landlords and pensioners into the tax net for the first time, though it said headline rates could then be cut to soften the blow for workers.

The Treasury declined to comment ahead of the Chancellor’s Budget later this month.