Chancellor Rachel Reeves has decided against raising income tax rates at the Budget on 26 November, reversing course after weeks of strong indications she would break Labour's election manifesto promise not to increase the basic, higher, or additional rates of income tax.
In recent weeks, Reeves had given strong signals that she would increase the rates. Still, as first reported by the Financial Times, the chancellor has decided against taking the step, partly because of better-than-expected economic forecasts.
Instead of raising income tax rates, the chancellor could opt to freeze or lower income tax thresholds, the salary levels at which the various rates kick in.
Government sources maintain they are still having to make what they call tough choices, while stressing that the move was not related to the recent turbulence over the prime minister's future.
What Prompted the Chancellor to Reverse Course on Tax Plans
The decision to abandon income tax rate increases came after the Treasury received better-than-expected economic forecasts, suggesting the fiscal hole facing the government would be smaller than previously anticipated.
UK government borrowing costs initially rose in response to reports of the U-turn on income tax rates.
Still, yields eased through the morning after further reports that the government's financial hole would be less than experts had predicted.
This improved outlook gave Reeves additional fiscal headroom to avoid the politically damaging move.
Reeves had not publicly confirmed she would raise income tax rates but had refused to rule it out in multiple interviews and parliamentary sessions.
Earlier this month, she took the unusual step of giving a pre-Budget speech to warn of the need for difficult choices and said everyone would have to contribute.
The reversal represents a significant shift in strategy as the chancellor seeks to balance fiscal responsibility with political viability ahead of crucial regional elections scheduled for next year.
Did you know?
If income tax thresholds are frozen for two additional years beyond 2028, someone working just 18 hours per week on minimum wage would be pulled into paying income tax for the first time, a phenomenon economists call fiscal drag that silently increases the tax burden without raising rates.
How Does This Decision Affect Labour Manifesto Promises
In its 2024 general election manifesto, Labour promised not to increase taxes on working people, which is why we will not raise National Insurance, the basic, higher, or additional rates of income tax, or VAT.
Breaking the manifesto promise would have meant difficult questions for Labour ministers and MPs ahead of elections in Scotland, Wales, and England scheduled for 2026.
At the start of the month, the party's newly elected deputy leader, Lucy Powell, said it is really important we stand by the promises that we were elected on and that we do what we said we would do.
Culture Secretary Lisa Nandy told BBC Breakfast that no decisions were made or set in stone until Reeves delivered the Budget in the House of Commons.
What I can tell you is that, as somebody who sits around that cabinet table, who has discussions with Rachel and has known her for a long time, I can tell you that she won't play fast and loose with people's money, she stated.
She takes her promises seriously and will do everything she can to ensure those choices are the fairest possible.
What Alternative Tax Measures Could Reeves Still Implement
If the chancellor has decided not to increase income tax rates, she will have to explore other ways to raise money to meet her self-imposed rules on debt and borrowing while filling a hole in the public finances of around 20 billion pounds.
She could still opt to extend the freeze on income tax and National Insurance thresholds introduced in April 2023, which were due to expire in 2028.
That would mean that as salaries rise, more people would be pulled above the income threshold at which they either start paying tax and NI or qualify for higher tax rates.
The Institute for Fiscal Studies estimates extending the freeze by two years could raise 8.3 billion pounds a year and would mean someone on the minimum wage would be liable to pay income tax if they worked just 18 hours a week.
Another option would be to lower the thresholds, which would raise more money than simply extending the freeze.
There have been reports that the Treasury is also considering other measures, including a new tax on electric vehicles and higher taxes on gambling companies. However, these would raise substantially less revenue than broad-based measures affecting millions of taxpayers.
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How Did Political Leaders React to the U-Turn Announcement
Conservative leader Kemi Badenoch said one retreat doesn't fix a Budget built on broken promises. Reeves must guarantee no new taxes on work, businesses, homes, or pensions, and she should go further by abolishing stamp duty, Badenoch stated.
The opposition leader's comments reflect Conservative attempts to position Labour as fiscally irresponsible despite the party's decision to preserve its manifesto commitment on income tax rates.
Liberal Democrat Treasury spokeswoman Daisy Cooper said if true, this 11th-hour screeching U-turn might just spare struggling families from yet another punch in the stomach.
Cooper's remarks highlight the political pressure Reeves faced from multiple directions, with opposition parties ready to exploit any perception of broken promises or excessive taxation.
A Treasury spokesperson declined to comment on speculation about changes to tax outside fiscal events, adding that the chancellor will deliver a Budget that takes fair choices to build strong foundations to secure Britain's future.
What Fiscal Challenges Does the Chancellor Still Face
Despite the improved economic forecasts, Reeves still confronts the challenge of raising approximately 20 billion pounds to meet her fiscal rules while funding public services that have experienced years of constrained budgets.
The chancellor has committed to balancing day-to-day spending with revenues during the current parliament and to ensuring that debt falls as a share of GDP by the end of the forecast period.
These self-imposed constraints limit her options for addressing the fiscal gap solely through borrowing.
The decision to rule out income tax rate increases narrows the available options for raising substantial revenue, forcing the chancellor to rely on a combination of smaller measures that collectively generate the required funds.
Extending threshold freezes, while less politically visible than rate increases, still represents a real terms tax increase that will affect millions of working people as wage growth pushes them into higher tax brackets.
The November 26 Budget will reveal whether Reeves can successfully navigate the competing demands of fiscal responsibility, political viability, and manifesto commitments while delivering the investment in public services that Labour promised voters.
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