starmer and reeves make bombshell tax u-turn - what does it mean for the budget?

Rachel Reeves is expected to confirm that income tax rates will remain frozen for another two years,in a major turnaround (Picture: Getty Images)

Rachel Reeves has backed down from plans to increase income tax in her Budget this month.

Speculation had been mounting that Reeves had prepared the country for a hike in what would have likely been a breach of Labour’s manifesto pledge to not raise taxes on ‘working people’.

Officials were drafting up plans to hike income tax by as much as 2p,alongside a simultaneous drop in national insurance contributions for those earning up to £50,000 annually.

Last week the Chancellor used a press conference to appear to pave the way for difficult choices in the upcoming fiscal event.

She added that everyone would need to ‘play their part’ in helping to turn the country’s finances around.

The Financial Times reported however that the Government indicated it would not go ahead with the income tax increase in a series of communications with the Office for Budget Responsibility (OBR).

Sign up to Metro's politics newsletter,Alright Gov?

Craig Munro breaks down Westminster chaos into easy to follow insight,walking you through what the latest policies mean to you. Sent every Wednesday. Sign up here.With a £30billion black hole to fill,Reeves will now have to turn to other revenue-raising measures in a bid to balance the books.However insiders suggested that the Chancellor had been swung by better than expected OBR forecasts.The the black hole at just £20billion due to higher tax receipts and better wage performances.But the potential public backlash,amid Labour’s cratering support,would have also been a factor.Nearly two thirds of voters would oppose a 1p increase in income tax,the latest YouGov polling has suggested.Culture secretary Lisa Nandy denied the Chancellor would ‘play fast and loose with people’s money’ but refused to be drawn into speculation Reeves had changed course on plans to raise income tax.She told BBC Breakfast: ‘She does take her promises seriously,and she will do everything that she can to make sure that those choices are the fairest possible choices.’Sir Keir Starmer and Rachel Reeves pictured during a visit to an engineering workshop in Anglesey,North Wales on Thursday (Picture: PA)

When is the autumn budget?

Chancellor Rachel Reeves will deliver the Autumn Budget on Wednesday,November 26,2025.

What else can we expect from the budget?

The Chancellor is also expected to confirm that tax thresholds will remain frozen for a further two years after 2028,a measure which is estimated to raise an extra £8billion.

Other measures reportedly being considered include new levies on property and a ‘pay per mile’ scheme on electric cars to make up for lost income from fuel duty.

Reeves was also expected to tweak the ‘two child’ cap on benefits,although it is as of yet unclear whether this will go ahead given the latest U-turn.

Labour 2024 manifesto included a pledge to ‘not increase taxes on working people’ including national insurance,income tax and VAT.

However Reeves used her Budget last year to increase employers’ NI contributions in what was seen as an indirect breach of the pledge.

Kemi Badenoch,the Conservative leader,called on Labour to go further and abolish stamp duty as well as guarantee no further taxes on businesses and pensions.

‘Only the Conservatives have fought Labour off their tax-raising plans’,she wrote.

‘But one retreat doesn’t fix a Budget built on broken promises.’

Liberal Democrat deputy leader Daisy Cooper described the move as an ’11th hour screeching U-turn’ but said struggling families had been spared ‘yet another punch in the stomach Budget’.

Last week,Reeves used a Downing Street speech to prepare the country for tough fiscal decisions,widely thought to include tax rises (Picture: AFP)

She said: ‘The Chancellor should look at our plan for a windfall tax on the big banks’ billions in profits and put £270 back into people’s pockets.’

The latest retreat comes days after the Sir Keir was plunged into a leadership crisis after anonymous briefers attempted to paint health secretary Wes Streeting as a ‘traitor’ plotting to oust the PM.

Streeting insisted he could foresee ‘no circumstances’ where he would challenge Sir Keir.

How could this affect you?

The news that an income tax increase is no longer on the cards,will be one less headache for many.

However the Treasury is understood to now be considering alternative ways to raise revenue by less overt means.

One option being pondered is reducing income tax thresholds,essentially pushing more people into higher rates,which strictly still keeping to the manifesto pledge not to raise taxes themselves.

The sudden change has also prompted a jittery response from markets,although an initial spike in borrowing costs following the announcement this morning has since eased.

And while income tax may be staying put,the Chancellor has not ruled out other tax raising measures,including on property and electric car owners.

Another unintended outcome of the tax threshold freeze would be that by 2028,the new full state pension would be higher than the income tax personal allowance.

This would mean all pensioners would have to pay tax on their earnings.

By comparison just half of those claiming state pension paid income tax in the year 2022-23.

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