Reeves ‘abandons budget plan to raise income tax’ – Daily Business

Rachel Reeves has dropped her controversial plan to raise income taxes in the budget, according to sources in Westminster.

The decision, first reported by the Financial Times, is said to be a response to fury among Labour backbenchers that the Chancellor was about to break a manifesto commitment.

The reported u-turn unnerved investors and gilts sold off steeply this morning. The 10-year yield was up 13bps points at 4.57% at the start of trading. The pound was also weaker against both the dollar and the euro.

The FTSE 100, which had been expected to breach the 10,000 milestone this week, was down 112 points (1.15%) at 9,695.10 after the first hour of trading.

Ms Reeves indicated at an unprecedented pre-budget press conference last week that a rise in the basic rate would underpin her budget on 26 November.

The Chancellor had been considering a 2p rise in income tax and a 2p cut in national insurance – a so-called ‘two up, two down’ plan – to shift the burden of tax rises away from workers and on to other groups, such as pensioners and landlords. Economists believe the move could raise more than £6 billion.

It is understood that the Office for Budget Responsibility has been informed of the decision to bin the plan and will look at other options to plug a multi-billion gap in the public finances.

If the u-turn is confirmed it will relieve pressure on the Scottish Government which was facing a similar tax rise to avoid a £1 billion fall in the block grant.

However, the more immediate concern is the reaction of the markets. Nigel Green, CEO of financial adviser deVere said the Budget process “looks increasingly unstable”.

He said: “The market’s verdict carries a familiar edge, drawing direct comparisons with the turbulence that engulfed the UK during the Truss ‘mini Budget’ crisis.”

The Chancellor is reported to have drafted two separate Budgets as internal arguments intensify. With less than two weeks before the statement, the absence of a settled plan is fuelling anxiety across global markets.

“Investors remember exactly how fast the Truss mini-budget spiralled,” said Green. “It took days for the gilt market to fracture under the weight of uncertainty. The Bank of England had to intervene. The memory is still fresh. Yet the current signals from Westminster suggest the lessons of that episode are fading.”

SNP Westminster Leader, Stephen Flynn, said: “This isn’t government, this is chaos.  Labour give the impression of a party that has completely lost control – playing a dangerous game with people’s finances so that their Prime Minister can try to cling to power. 

“But everyone now knows the clock is ticking until he is dumped from Downing Street. His last act should not be to play fast and loose with the public finances – they’ve already more than paid the price for the constant chaos and crisis that passes for politics at Westminster.”

Ms Reeves has already abandoned plans for a multibillion-pound raid on lawyers, accountants and private doctors who use limited liability partnerships. It is said that the expected gain would be wiped out as those affected took measures to avoid paying.

Instead, she is likely to turn to a range of other taxes on gambling, property and assets.

She is also expected to extend the freeze on income tax thresholds, a move previously described as a stealth tax.

The Institute for Fiscal Studies, a think tank, found that extending the threshold for another two years until 2030 would mean that 10.1 million people — equivalent to one in five of those over the age of 16 — become higher-rate taxpayers.

The extension would raise £8.3 billion for the Treasury but mean that 790,000 extra people will be dragged into paying the higher rate of income tax.

As a result, more minimum wage workers and pensioners are being dragged into paying tax that will wipe out some of the gains from higher pay and pensions, according to new data.

Income tax thresholds and national insurance contributions are set to remain frozen until April 2028 but if the Chancellor extends that by a further two years it would raise an additional £8.3bn for the Exchequer, says the Institute for Fiscal Studies.

However, more minimum wage workers are being pulled into tax due to a combination of the tax threshold freezes and substantial minimum wage rises.

Under an extension to 2029–30, a minimum wage worker would need to work just 18 hours per week to be liable for income tax – the lowest level since the minimum wage was introduced in 1999.

One consequence of this is to reduce how much of a minimum wage rise goes to workers, with more of the pay rise being recouped by the Exchequer in the form of tax.

For the first time since its introduction, the full new state pension, currently £11,973 a year, is set to exceed the income tax personal allowance in 2027–28.

In 2022–23, just under half of those on the full new state pension paid tax on their incomes. By 2027–28, all them will do so.

Matthew Oulton, a research economist at IFS, said: “The freezes to personal tax thresholds have already represented a huge tax rise.

“Extending them would raise significant revenue in a broad-based and progressive way.

“It would increase tax on all employees working full-time, most working part-time, most minimum wage workers and many low-income pensioners.

“The Chancellor may well want to raise more revenue and change who pays tax, and changing thresholds is a reasonable tool to use. But freezes set many years in advance are not – how big the tax rise turns out to be depends upon the unknown and unpredictable path of inflation.”