Labour leader Keir Starmer and Shadow Chancellor Rachel Reeves have abandoned plans to increase income tax. This "bombshell tax U-turn" comes ahead of the Autumn Budget, where Reeves is expected to confirm income tax rates will remain frozen for another two years. Initially, speculation suggested a tax hike, which would have contradicted Labour's manifesto pledge not to raise taxes on "working people."
The decision to reverse course is attributed to several factors, including better-than-expected Office for Budget Responsibility (OBR) forecasts that reduced the projected budget deficit, and a potential public backlash. Recent polling indicated that a significant majority of voters would oppose an income tax increase. Political opponents have criticized the move as an "11th hour screeching U-turn" while acknowledging relief for struggling families.
With the income tax increase off the table, Reeves will need to find alternative revenue-raising measures to address the remaining budget deficit. Potential options being considered include new levies on property, a "pay per mile" scheme for electric cars, and freezing tax thresholds for another two years, which is expected to generate billions. Another possibility is reducing income tax thresholds, which would push more people into higher tax brackets without directly increasing tax rates. The freeze on tax thresholds also risks a situation where all pensioners may have to pay tax on their earnings by 2028, as the full state pension could exceed the personal income tax allowance. The markets have responded with some volatility to the news.
