British Chancellor Rachel Reeves has made a pivotal decision to abandon plans for an income tax rate hike in the upcoming November 26 Budget, a move that has sent ripples through the political and financial landscapes of the United Kingdom. The reversal, announced on November 14, 2025, comes in the wake of unexpectedly positive economic forecasts and amid mounting pressure to honor Labour’s election promises.
According to BBC, Reeves had previously signaled a potential increase in income tax rates—a step that would have broken Labour’s high-profile 2024 manifesto pledge not to raise the basic, higher, or additional rates of income tax. The suggestion was first floated as a response to a projected £30 billion gap in public finances, mainly attributed to a downgrade in national productivity. However, recent estimates from the Office for Budget Responsibility (OBR) have painted a brighter picture, shrinking the anticipated fiscal hole by £10 billion to about £20 billion, thanks to stronger wage growth and tax receipts.
This shift in the fiscal outlook has prompted Reeves to consider alternative strategies for meeting her self-imposed rules on debt and borrowing, and for filling the remaining gap in the nation’s finances. Instead of raising income tax rates, options now on the table include freezing or even lowering income tax thresholds—the salary levels at which higher rates of tax kick in. While such a move would not technically breach Labour’s manifesto promise, it would still mean higher tax bills for many, as more people are pulled above the threshold and into higher tax brackets. The BBC notes that an extension of the threshold freeze, which was first introduced in April 2023 and set to expire in 2028, could raise as much as £8.3 billion annually. The Institute for Fiscal Studies has pointed out that this would mean even someone on the minimum wage could start paying income tax if they worked just 18 hours a week.
Other revenue-raising options reportedly under consideration include new taxes on electric vehicles and higher levies on gambling companies. The Treasury is also said to be exploring property and pension-related taxes, though, as Jane Foley, head of FX strategy at Rabobank, told Reuters, “these are not as clean, and may have bigger secondary implications, may alienate the business community.”
The political stakes are high. Labour’s 2024 general election manifesto was explicit in its promise: “We will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher or additional rates of income tax, or VAT.” Any deviation from this pledge would risk alienating voters ahead of key elections in Scotland, Wales, and England.
Party leaders have been keen to reinforce their commitment to these promises. On November 11, Deputy Leader Lucy Powell declared, “It is really important we stand by the promises that we were elected on and that we do what we said we would do.” Health Secretary Wes Streeting echoed this sentiment, stating, “It’s really important that we keep our promises and that we stand by our manifesto.” He added that speculation about tax rises demonstrated just how challenging the public finances are, but advised it was “wise to stop speculating” and “wait for the Budget.”
Yet, not everyone is convinced by the government’s handling of the situation. Kemi Badenoch, the Conservative leader, criticized Labour for what she described as chaos and irresponsibility: “It’s good if they aren’t going to increase income taxes, but the truth is they shouldn’t be increasing any taxes at all. I’ve never seen a government do this in the run up to a budget. I have never seen this level of chaos, this level of irresponsibility.” Badenoch went further, demanding that “Reeves must guarantee no new taxes on work, businesses, homes or pensions—and she should go further by abolishing stamp duty.”
Liberal Democrat Business spokeswoman Sarah Olney took aim at the chancellor’s communications, saying, “The chancellor gave a press conference to trail her income tax hikes. She must come before the British public today, unroll that particular pitch and come clean on what on earth is going on at the Treasury.” Meanwhile, the SNP’s social justice secretary, Shirley-Anne Somerville, described the UK government as being in “complete disarray.”
The government, for its part, insists that the decision is not linked to recent turbulence surrounding the prime minister’s future. A Downing Street spokesman told BBC, “The chancellor was very clear about addressing the challenges this country faces and her priorities in addressing those challenges—all of that stands. One of the objectives of the budget is to build more resilient public finances with the headroom to withstand global turbulence and to give businesses the confidence to invest.”
Markets, however, have been less reassured. As reported by Reuters, British assets tumbled after news broke of the U-turn on income tax rates. The 10-year government bond yield spiked 13 basis points to 4.58%, its highest in a month and the biggest one-day rise since July. Sterling fell 0.4% to $1.312, and the euro surged to its strongest level against the pound since April 2023, trading around 88.64 pence. Jeremy Stretch, head of G10 FX Strategy at CIBC Markets, explained, “Clearly, the market had been hoping the government would take steps to deal with its fiscal shortfall and that would mean a rise in income tax. So, what we’re seeing is a lack of confidence from markets and especially the bond markets.”
Jane Foley of Rabobank drew parallels with the infamous “Liz Truss moment” of 2022, when bond prices plummeted in response to the former prime minister’s budget plans. “The market was feeling pretty smug that the bond market had sort of won, that she (Reeves) was so frightened of upsetting the gilt market and creating another ‘Liz Truss moment’ that she would hike taxes, and they liked the cleanness of that proposal,” Foley said. Now, with income tax hikes off the table, investors worry Reeves may have to borrow more, further unsettling bond markets.
There is also concern over the potential impact on the Bank of England’s monetary policy. Markets had been betting that weak economic data and cooler inflation would allow the Bank to cut interest rates in December. A less fiscally tight budget, or one that fuels higher inflation—something Reeves has said she wants to avoid—could complicate that outlook. Seema Shah, chief global strategist at Principal Global Investors, told Reuters, “If the market does eventually believe the growth forecasts that are coming through, which are a little bit more optimistic than consensus, they will settle down. But at the moment, I would expect the stress to persist for a bit longer.”
As the November 26 Budget approaches, all eyes are on Reeves and the government’s next moves. The chancellor’s decision to forgo an income tax rate hike may have averted one political crisis, but it has opened up a new chapter of uncertainty for Britain’s economy and its financial markets.
