In a dramatic turn of events, Chancellor Rachel Reeves has abandoned plans to raise income tax rates in the UK’s upcoming Budget, scheduled for November 26, 2025. The reversal, which unfolded on November 14, came after weeks of speculation, public hints, and mounting political intrigue within the Labour Party. The decision, attributed to improved economic forecasts from the Office for Budget Responsibility (OBR), has nonetheless left markets rattled and sparked a heated debate over the government’s fiscal strategy.
Just days before the U-turn, Reeves had strongly suggested in a BBC interview that tax rates would rise, a move that would have broken Labour’s election manifesto pledge not to increase income tax, National Insurance, or VAT rates. The so-called "2 up, 2 down" plan—raising income tax rates by 2p while simultaneously cutting National Insurance by 2p—was sent to the OBR for costing earlier in the month. At the time, the UK faced a daunting £30 billion hole in its public finances, mainly due to a downgrade in productivity forecasts. According to the BBC, this proposal was expected to raise several billion pounds, particularly from non-wage income sources such as landlords and savings.
However, as the OBR’s latest assessments rolled in, the picture brightened. Improved projections for wage growth and tax receipts slashed the fiscal gap to around £20 billion, effectively removing the immediate need for a headline-grabbing income tax hike. As The Times reported, Reeves quickly shelved the plan, aware that pushing forward would aggravate already mutinous Labour MPs and risk alienating voters weary of broken promises.
The sudden shift did not go unnoticed. Financial markets, which had been reassured by Reeves’s tough fiscal talk, reacted nervously to the policy uncertainty. The cost of government borrowing spiked, with yields on 10-year gilts rising by 12 basis points to 4.56%—the worst one-day sell-off since September, according to the Financial Times and The Independent. Observers described the move as a "panic" reaction, with some insiders blaming Downing Street for interfering in an effort to protect Prime Minister Keir Starmer from a potential leadership challenge. One unnamed minister told The Independent that Number 10 was “gripped by a state of panic.”
Health Secretary Wes Streeting tried to steady the ship, emphasizing on November 14 that, "It is really important that we keep our promises and we stand by our manifesto. The fact that there's been speculation about income tax shows how difficult the situation is with public finances and secondly that the chancellor is determined to stick to her fiscal rules." Yet the damage to market confidence was already done, with borrowing costs rising and commentators across the political spectrum questioning the government’s grip on events.
With the income tax hike off the table, Reeves is now expected to pursue a “smorgasbord” of smaller tax-raising measures. These include levies on gambling, a bank levy, wealth taxes, and a so-called mansion tax on properties valued over £2 million. According to The Times and The Independent, she is also likely to extend the freeze on personal tax thresholds for another two years—a move that will push more earners into higher tax brackets as wages rise, raising about £8 billion annually and contributing to a £40 billion per year freeze. Additional possibilities floated include taxes on salary sacrifice schemes and a fuel duty equivalent for electric vehicles.
Not everyone is convinced this patchwork approach will work. Jim O’Neill, a former Treasury minister and Goldman Sachs executive, called the developments “bothersome.” He told The Independent, “If it means they’re defaulting to accumulated fringe, possibly growth-damaging taxes again, it will be bothersome.” Stephen Millard, deputy director of the National Institute of Economic and Social Research, warned of two key dangers: “First, by resorting to smaller changes to lots of marginal taxes, the chancellor risks making the overall tax system ever more complicated and inefficient (in the sense of creating more distortions in the economy). Second, this would make it harder for the chancellor to build a large buffer against her fiscal rules. As we’ve seen over the past year, having a small buffer creates uncertainty and endless speculation about further tax rises, given it would only take a small downgrade in the UK’s growth prospects to wipe the buffer out.”
Tax expert Dan Neidle echoed these concerns, telling The Independent that relying on a “grab bag” of tax measures would be “very damaging.” Isaac Delestre, senior tax analyst at the Institute for Fiscal Studies, added that while raising money from income tax thresholds could be effective, “the risks of doing something unnecessarily economically damaging increase if she is going to look to raise large amounts from smaller taxes.”
Meanwhile, the political drama surrounding the Budget has only intensified. The reversal on income tax followed two weeks of public hints that rates would rise, and came amid swirling rumors of a leadership challenge to Keir Starmer, reportedly fueled by Downing Street briefings about Health Secretary Wes Streeting’s ambitions. Ruth Curtice, chief executive of the Resolution Foundation, noted the unusual level of pre-Budget media briefings and public speeches: “It is normal for economic forecasts and policies to change in the run-up to the Budget. It is not normal for so much of that to be laid bare in public.”
Despite the chaos, Treasury sources maintain that the decision to drop the income tax hike was based on sound economic data, not political panic. As a Treasury spokesperson told The Independent on Friday, “We do not comment on speculation around changes to tax outside of fiscal events. The chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.”
The overarching strategy now, according to insiders cited by the BBC, is to increase the government’s fiscal headroom from the current £10 billion per year, providing a bigger buffer to tackle cost-of-living pressures and demonstrate prudent management of the nation’s finances. Yet, as final decisions on the Budget have not been made, and with the big speech still looming, uncertainty continues to hang over Westminster and the markets alike.
As the dust settles from a week of leaks, reversals, and market jitters, all eyes are on Rachel Reeves and her November 26 Budget speech. Whether her new approach will satisfy both the markets and her party—or simply set the stage for the next round of political drama—remains to be seen.
