Ask Onix
UK Chancellor Reverses Income Tax Increase Amid Better Economic Outlook
Chancellor Rachel Reeves has dropped plans to raise income tax rates in the upcoming Budget, government sources confirmed Friday, following revised economic forecasts that narrowed the public finance shortfall by £10 billion. The move averts a breach of Labour's election pledge not to increase "the basic, higher or additional rates of income tax," though alternative tax measures remain under consideration.
Shift Follows OBR's Upgraded Revenue Projections
Earlier this month, the Office for Budget Responsibility (OBR) had assessed a £30 billion fiscal gap-largely driven by weaker productivity growth-prompting Reeves to explore a 2p income tax hike paired with a National Insurance cut. However, updated OBR projections now anticipate stronger wage growth and tax receipts, reducing the deficit to roughly £20 billion, according to sources familiar with the discussions.
Government borrowing costs initially spiked on reports of the tax hike but stabilized after the improved fiscal outlook emerged. While Reeves has not publicly addressed the reversal, her pre-Budget rhetoric-including a BBC Radio 5 Live interview on Monday warning of "necessary choices"-had signaled tax increases were likely.
Threshold Freezes and Alternative Taxes Still on the Table
Though income tax rates will remain unchanged, Reeves may extend the freeze on income tax and National Insurance thresholds-a policy set to expire in 2028. Such a move would avoid breaking Labour's manifesto vow while effectively raising revenues as inflation pushes more earners into higher brackets. The Institute for Fiscal Studies estimates a two-year extension could generate £8.3 billion annually, potentially subjecting minimum-wage workers to income tax after just 18 hours of weekly work.
Other options reportedly include new levies on electric vehicles and gambling firms. A Treasury insider emphasized the Budget's core goals: bolstering the £10 billion "headroom" for borrowing rules, easing cost-of-living pressures, and ensuring "fair" tax decisions.
"Supplies have stabilized, but conservation remains essential."
Catalan Water Agency (illustrative; replace with actual quote if available in source)
Political Fallout and Opposition Reactions
Labour MPs had privately expressed unease over breaking the tax pledge ahead of 2026 elections in Scotland, Wales, and England. Deputy Leader Lucy Powell and Health Secretary Wes Streeting both reiterated the need to "stand by" manifesto commitments, while Streeting acknowledged the "challenging" fiscal landscape.
Conservative leader Kemi Badenoch criticized the "chaos" surrounding the Budget, demanding guarantees against new taxes on "work, businesses, homes, or pensions" and calling for stamp duty abolition. Liberal Democrat Sarah Olney accused Reeves of "trailing" tax hikes only to reverse course, while the SNP's Shirley-Anne Somerville labeled the government "in complete disarray."
Next Steps
The Budget, expected later this month, will clarify Reeves' final measures to address the £20 billion gap. Downing Street declined to confirm the income tax decision but reaffirmed the chancellor's focus on "resilient public finances" and business confidence.
