Chancellor Rachel Reeves has abandoned plans to raise income tax rates in the upcoming budget, following a revolt within the Labour Party and intense briefing wars. The U-turn, first reported by the Financial Times, was confirmed by a source to the Guardian, who said Prime Minister Keir Starmer and Reeves had ditched the proposal to break a manifesto pledge on taxes for working people.
The decision comes after a week of turmoil, with allies of Starmer suggesting he would fight any leadership challenge, and speculation that Health Secretary Wes Streeting might be a potential challenger—a claim he publicly denied. The tax U-turn was sent to the Office for Budget Responsibility on Wednesday, and Downing Street did not deny the reports but declined to comment on budget matters.
Reeves had previously informed the budget watchdog of plans to raise income tax, breaking Labour's key manifesto pledge. However, the FT reported she may now look at thresholds at which people pay tax, which could be seen as an income tax rise by stealth. Sources close to the chancellor stressed her desire for significant headroom in the budget to avoid speculation over breaching fiscal rules.
Reeves and Starmer are now likely to rely on several smaller tax-raising measures to fill an anticipated multibillion-pound hole caused by a downgrade in productivity and U-turns on other policies, including cuts to winter fuel allowances and disability benefits. Among these measures could be higher levies on gambling, pushed by former Prime Minister Gordon Brown, to fund ending the two-child benefit limit—though Treasury sources said revenues from such levies would not come close to covering that cost.
The U-turn comes 10 days after Reeves gave a seemingly certain indication of her plans during a Downing Street press conference, where she refused to rule out raising income tax. Downing Street and the Treasury had been preparing the ground for weeks with Labour MPs for a breach of the manifesto, stressing that they should not speak out against the budget due to potential effects on bond markets and borrowing costs. However, that message now rings hollow after days of internal warfare over a potential leadership challenge.
Reeves is already expected to extend a freeze on personal tax thresholds introduced by the Conservatives. Despite Labour's large majority, MPs had shown their parliamentary might at the welfare vote in July, forcing the government into a damaging U-turn. Months of discontent with Starmer and his political operation burst into the open over the income tax plan, with MPs openly discussing whether it would be the end for the prime minister.
