The Institute of Chartered Accountants has warned that the chancellor may raise VAT from 17.5 per cent to 19 or 20 per cent to pay for boost to public service spending as he ponders his options ahead of April's Budget.

The Independent reveals that Gordon Brown is considering a rise to National Insurance contributions from 10 to 11 per cent, bringing £3.3 billion into the public purse.

He is also contemplating an extra £900 million by raising the upper limit on which NI is paid, from £29,900 to £33,935. The changes would cost someone on £40,000 £650 a year and someone on £20,000 an annual bill of £150.

The pill would be sweetened with cuts to the lower end of the income ladder, increasing the level at which workers start to pay National Insurance.

Brown yesterday set out a series of new measures aimed at helping small businesses and amid backbench dissent over Labour's close ties to business reaffirmed the government's commitment to being a friend of entrepreneurs.