Chancellor Rachel Reeves has abandoned plans to increase income tax in this month’s budget, turning away from a dramatic break with Labour’s election promises after warning it could lead to a backlash among MPs and voters.
According to officials briefed on the decision, Reeves and Prime Minister Sir Keir Starmer have “torn up” the proposal contained in the Chancellor’s first “major action” submission to the Office for Budget Responsibility earlier this month. The U-turn, first reported by the Financial Times, was only reported to the OBR this week.
Reeves appeared to hint at an income tax increase at a press conference last week, fueling speculation that Labor was preparing to raise both the basic tax rate and higher tax rates. However, concerns that such a move would anger already restive backbenchers and anger voters amid rising living costs led to a rapid rethink.
Instead of a single, high-profile tax rise, Reeves is now expected to pursue what Treasury insiders call a “smorgasbord” approach: a series of targeted tax measures aimed at raising the £30 billion needed to close the gap in the public finances. Likely options include a new gambling levy and higher taxes on high-value real estate.
The chancellor is also under pressure after abandoning a separate multi-billion-pound plan to impose a fee on professionals who use limited partnerships, such as lawyers and accountants. Reeves had hoped a new levy would raise around £2bn a year, but Treasury modeling suggested it could end up costing the government money as companies accelerated their profit declarations to avoid the new levy. “Rachel decided it just wasn’t worth it,” one official said.
There is further uncertainty over proposals for a new “wind-up fee” – an exit tax of up to 20 per cent on assets left by high-net-worth individuals in the UK when they move to low-tax jurisdictions. Some officials now say the measure may be abandoned altogether amid concerns it could harm investments, particularly in sectors such as artificial intelligence and technology.
Reeves had previously considered a 2p increase in income tax combined with a 2p cut in National Insurance, a move that would shift the tax burden from workers to pensioners and landlords. Economists estimate the change could raise more than £6 billion, but the political costs appear to have outpaced the revenue gains.
However, it is still expected to extend the freeze on income tax limits – a policy that effectively functions as a stealth tax. Analysis by the Institute for Fiscal Studies shows that extending the freeze until 2030 would drag 10.1 million people into higher tax brackets, bringing in £8.3 billion for the Treasury, but would drag 790,000 additional earners into the higher bracket and force millions of pensioners to pay tax on their state pension for the first time.
The decline in income tax is also a result of intense lobbying by the city and professional services firms over the LLP fee, as well as warnings that too many large, one-off tax shocks could undermine economic confidence at a critical moment.
Reeves has insisted that “national interests must come before political expediency” and that “we all have to do our part”, but there is a growing recognition within the government that the budget must balance fairness and political realism – particularly after a decade of stagnant living standards.
Culture Secretary Lisa Nandy defended the chancellor’s approach, saying Reeves would make “the fairest decisions possible” to stimulate the economy and “ease the pain” faced by households over the last 15 years.
“When the budget is presented on November 26,” she said, “we will ensure that those with the broadest shoulders bear the greatest burden.”
With less than two weeks to go, Reeves now faces an increasingly narrow set of options as she tries to craft a budget that stabilizes public finances without triggering a political revolt.
