Starmer and Reeves ‘rip up plans’ to raise income tax in the Budget

The government is said to have ditched plans to hike income tax rates in the Autumn Budget in a major U-turn.

Chancellor Rachel Reeves and prime minister Keir Starmer have “ripped up” earlier proposals to raise the basic and higher income tax rates, the Financial Times reports.

The chancellor had earlier signalled she would break a key Labour manifesto pledge by raising rates to drum up much-needed cash.

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Hiking the basic rate could have raised around £15-20 billion.

However, she now appears to have dropped the plans as she looks for other ways to fill a fiscal hole estimated to be up to £30 billion.

One reported option could be to cut the thresholds at which people pay different rates of income tax while leaving the headline basic and higher rates of the tax unchanged, dragging more people into paying tax.

The chancellor could also extend the freeze on income tax thresholds, due to end in 2028. This would draw more people into paying tax through what’s known as fiscal drag.

Recent analysis from wealth management firm Quilter suggests someone currently earning £44,000 would see their tax bill increase by £843 over the next four years, if thresholds were frozen until 2030.

Kallum Pickering, chief economist at investing banking firm Peel Hunt, said ditching income tax rises was one thing, but choosing to not lower income tax thresholds would leave the chancellor with limited alternatives.

“Her remaining option would likely be to opt for a haphazard patchwork of smaller anti-growth tax increases. That would be a bad outcome,” he said.

“It would add to uncertainty, further damage the government’s already tarnished credibility, and complicate any Bank of England judgement to potentially offset tax rises with rate cuts.”

MoneyWeek has contacted HM Treasury asking for comment.

Income tax U-turn sends gilt yields rising

Gilt yields surged this morning following the news income tax rises were off the table at the Autumn Budget. Yields move inversely to gilt prices.

Yields on 10-year gilts, also known as bonds, moved towards 4.54% while the pound fell to a two-year low against the euro.

Nigel Green, chief executive officer of global financial advisory deVere Group, said: “Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the government is improvising.

“There’s nothing investors hate more than indecision disguised as strategy.”

Green suggested the reaction was bond traders “telling the Treasury that they will not tolerate mixed signals” and were “pricing risk in real time”.

He added the sell-off this morning saw Reeves potentially making the same mistake as former prime minister Liz Truss in 2022, whose “mini-Budget” spooked financial markets and led to gilt yields soaring.

“Bond markets cannot be managed with wishful thinking. They respond to discipline, coherence and clarity. When those elements disappear, yields surge.

“The pattern we are seeing today aligns with the behaviour that preceded the Truss meltdown, and that should concern every saver and investor.”