Rachel Reeves to abandon plans to raise income tax rates in budget | Budget 2025

Rachel Reeves is set to abandon plans to raise income tax in her budget as the Chancellor is reportedly “shredding up” key measures following party turmoil.

Plans to break the manifesto pledge on income tax have been canceled by prime minister Keir Starmer and the chancellor, a source told the Guardian.

It followed a week of extraordinary party briefing wars in which the prime minister’s allies suggested he would fight any leadership challenge, with some pointing to health secretary Wes Streeting as a potential rival, which the Prime Minister has publicly denied.

The bombshell tax U-turn, first reported by the Financial Times, was sent to the Office for Budget Responsibility on Wednesday. Downing Street did not deny the reports but said it would not comment on budget matters.

Reeves had previously briefed the budget watchdog on his plans to raise income taxes; This violated one of Labour’s most important manifesto promises.

The FT reported that Reeves could now look at the thresholds at which people pay tax, which could possibly be seen as a secret income tax increase.

Sources close to the chancellor emphasized his desire to leave significant headroom in the budget to avoid a maelstrom of speculation about whether he would breach fiscal rules.

Reeves and Starmer will now likely rely on a number of smaller tax-raising measures to fill the multibillion-pound “gap” expected to emerge due to a drop in productivity and U-turns on other policies, including winter fuel discounts and cuts to disability benefits.

These measures will include former prime minister Gordon Brown introducing higher taxes on gambling to cover the cost of ending the two-child benefit limit; This is a potentially huge cost for Reeves.

Treasury sources said it was unlikely revenues from taxes would come close to financing the end of the cap.

The U-turn comes 10 days after Reeves gave a seemingly definitive signal of his plans to raise income tax in a sudden Downing Street press conference in which he refused to rule out increasing income tax.

“As chancellor, I must face the world, not the world I want it to be,” he said, referring to tax increases.

Downing Street and the Treasury, together with Labor MPs, have been preparing the ground for the breach of the manifesto for weeks. In particular, it was emphasized to Labor Party MPs that they should not speak against the budget due to the impact that possible measures could have on bond markets and the UK’s borrowing costs.

That message to MPs is likely to ring hollow if the chancellor returns to the U after days of infighting over a potential challenge to the prime minister’s leadership and attention to briefings for health secretary Wes Streeting.

Reeves is expected to further extend the freeze on personal tax thresholds introduced by the Conservatives.

Over the past few weeks, the Treasury has held roundtables with ministers and economists to try to convince Labor MPs of the income tax plan and convince them of the need for fiscal stability.

Despite Labour’s huge majority, MPs showed their parliamentary power in July’s welfare vote, forcing the government into a damaging U-turn.

Government sources initially felt the charm offensive was working, but many Labor MPs were alarmed at the impact on their constituents and were skeptical about the wisdom of not delivering on such an important manifesto promise.

Months of discontent with Starmer and his political operation have been exposed by the plan, with MPs openly debating whether it could be the end of the prime minister.

This week Downing Street launched an extraordinary operation to strengthen its leadership by telling the Guardian about the dangers of destabilizing the government and insisting Starmer would meet any challenge. But their efforts backfired dramatically when close allies of the prime minister shared speculation that Wes Streeting was planning an imminent coup.

Labor MPs and ministers – including some in the cabinet – were stunned by No 10’s admission that the prime minister was vulnerable and believe the action fired the starting gun in the race to replace him.