UPDATED: Labour rules out income tax rise in Budget

Reeves has “ripped up” proposals to raise the basic and higher income tax rates amid fears it would anger voters

Chancellor Rachel Reeves has reportedly abandoned plans to raise income tax rates in the Autumn Budget later this month after widespread backlash over the decision.

According to the Financial Times, Reeves has “ripped up” proposals to raise the basic and higher income tax rates amid fears it would anger voters.

While Labour had previously pledged not to raise income tax, VAT or national insurance for employees in its manifesto, the Office for Budget Responsibility is expected to downgrade its productivity forecasts ahead of the Budget, which could leave a £20 billion hole in the public finances.

Last week in a surprise pre-Budget speech, Reeves, right, refused to rule out tax rises to plug a hole in the public finances, stating that “easy answers” to fix economic issues would be “irresponsible”, leading many to believe that income tax rises could be on the table.

Instead, it is now thought that the government could raise revenue by freezing income tax thresholds, alongside introducing other measures such as changes to capital gains tax, dividend allowances, inheritance thresholds, and pension reliefs.

Earlier this week, the Treasury ruled out changes to tax-free pension lump sum amounts in the upcoming Autumn Budget.

City insiders have been speculating that Chancellor Rachel Reeves will cut or cap the tax-free pension lump sum, which currently allows savers to withdraw up to 25% of their pension pot tax-free, up to £268,275.

Charlotte Kennedy, chartered financial planner, said: “Reports that the Chancellor is set to abandon plans to raise income tax are jarring, especially after her recent pre-Budget speech seemed to signal an increase.

“The government still has a multi-billion-pound fiscal black hole to plug, and the reported move could put other unsavoury tax changes back on the table.

“The harsh reality is that taxpayers’ income tax burden is already increasing because of the deep freeze in thresholds, which pushes people into higher tax brackets as their earnings rise.

“With less than two weeks to go until Budget Day, a smorgasbord of ideas is being tested on the public ahead of the fiscal event.

“A recent survey of more than 3,000 UK adults revealed that potential changes to pensions, income tax and inheritance tax regimes are the leading concerns ahead of the Budget.

“Amid the uncertainty, it remains sensible to avoid knee-jerk reactions and irreversible decisions that could undermine your financial resilience.”

What did the commentators say?

The Office for Budget Responsibility told the chancellor that the hole in the public finances is now “closer to £20 billion than the £30 billion originally expected”, said Steven Swinford and Mehreen Khan in The Times.

Reeves promptly ripped up the manifesto-busting plan she knew would “aggravate mutinous” Labour MPs and “fuel anger among voters”.

Downing Street officials “insisted” the Budget re-write was not a “response to the leadership crisis that has engulfed Keir Starmer” this week, said George Parker, Anna Gross and Sam Fleming in the Financial Times. But the chancellor’s about-turn has had an immediate effects on the markets, with gilts having their “worst one-day sell off since September” when the news broke.

When Reeves finally delivers the Budget, she will probably favour raising money from multiple avenues, including levies on gambling and taxes on expensive properties. She is also expected to “extend a freeze on personal tax thresholds” for a further two years, pushing more people into higher tax brackets as their wages rise.

“Rachel Reeves is Queen of the U-turn,” said Harvey Jones in the Daily Express. “She was forced to backtrack” on scrapping the winter fuel payment” and “caved on” over proposed cuts to the “ballooning” benefit bill.

“It is a mess,” said Matthew Lynn in The Telegraph. The Budget is “turning into a shambles”. In a week of “in-fighting, plotting and leaks”, the chancellor is being “buffeted” by political events, instead of controlling them. The proposed “series of minor tax rises” to try to stay within the fiscal rules shows that her preparation has “descended into a farce”.

What next?

A gap of £20 billion is “still a big number”, said Pippa Crerar in The Guardian. In addition to freezing income tax thresholds, we should expect “taxes on salary sacrifice schemes” and even a “fuel duty equivalent for electric vehicles”.

Talk of a new “exit tax” on entrepreneurs leaving the country has dwindled somewhat, said Swinford in The Times, but, if it is brought in, it could have a “significant impact on investment and growth”, particularly “in the artificial intelligence and broader tech sectors”.