Chancellor Rachel Reeves has executed a dramatic reversal on plans to increase income tax, a move that has sent shockwaves through Westminster and triggered instability in financial markets.
The Sudden Policy Reversal
Friday 14 November 2025 saw Chancellor Rachel Reeves abandon her proposal to raise income tax, despite previous strong indications that she would break a key manifesto pledge. The surprise announcement stunned fellow ministers and MPs who had expected the tax increase to proceed.
Treasury officials quickly attributed the policy U-turn to better-than-expected economic data, suggesting the improved fiscal outlook made the tax rise unnecessary. However, alternative accounts emerging from government suggest Downing Street interference may have played a role, with some ministers believing the Prime Minister's team intervened to protect him from the political fallout of breaking a manifesto commitment.
Immediate Market Consequences
The Chancellor's sudden change of direction provoked immediate turbulence in financial markets. Government borrowing costs spiked sharply, with the yield on 10-year government gilts rising to 4.56 per cent.
This market reaction reflects investor concerns about the government's fiscal strategy and its potential impact on public finances. The instability underscores how sensitive markets remain to unexpected policy shifts from the Treasury.
Alternative Tax Measures Under Consideration
With the income tax increase now off the table, Rachel Reeves is expected to consider a range of smaller tax measures to raise revenue. Potential options include implementing a new gambling tax, increasing the bank levy, introducing various forms of wealth taxes, or establishing a mansion tax targeting properties valued at £2 million and above.
However, economists have raised serious concerns about this approach, warning that relying on what they describe as a 'grab bag of smaller tax measures' could make the UK tax system significantly more complicated and less efficient. Some experts have suggested that such an approach could ultimately prove damaging to economic growth and fiscal stability.
The Chancellor now faces the dual challenge of stabilising market confidence while developing a coherent tax strategy that can satisfy both her political colleagues and economic experts.
