Chancellor Rachel Reeves’s decision to abandon a planned rise in income tax has divided opinion, with critics accusing her of caving to political pressure while supporters argue she avoided a costly mistake. The U-turn, announced just days before the budget, came after weeks of signals that breaking Labour’s manifesto pledge might be necessary to address a fiscal shortfall.
Government insiders revealed that the change of heart was triggered by revised official forecasts showing a smaller-than-expected gap of £20bn, not the previously feared £30bn. However, some officials conceded that politics played a significant role, as Prime Minister Sir Keir Starmer faced a backlash over a botched leadership bid by aides.
Internal debates had long split the cabinet: one camp advocated for the first income tax rise in 50 years to build fiscal headroom, while the other warned of political suicide and favoured a “smorgasbord” of smaller tax hikes. Reeves had appeared to side with the first group, delivering speeches warning of tough choices and hinting at breaking manifesto promises.
The chancellor considered options such as raising income tax by 2p while cutting national insurance by 2p, which would have raised £6bn but hit pensioners and landlords. Others proposed limiting national insurance cuts to earners below £50,000. Some planned tax rises, like removing breaks for professionals in partnerships, were scrapped after the Office for Budget Responsibility deemed them ineffective.
Reeves ultimately opted to freeze tax thresholds longer, dragging more people into higher tax brackets and raising an estimated £7.5bn. The OBR’s final forecasts, including wage growth data, were presented on Monday, but Reeves continued to hint at an income tax rise until the last minute. “Politics played a part – it always does,” a government official said.
