Rachel Reeves ‘U-turns and ABANDONS plot to raise income tax in budget’: Chancellor faces £30bn black hole after caving to backlash from her own MPs against manifesto-busting plans

Rachel Reeves has abandoned her plan to raise income tax in the Budget, it was reported last night.

Speculation had been mounting that Labour would break its manifesto pledge not to raise taxes on working people.

But the proposal to increase income tax has been ‘ripped up’, according to the Financial Times, over fears of a major backlash from MPs and the public.

The Office for Budget Responsibility was informed of the change of heart on Wednesday, officials told the newspaper.

The decision will leave the Chancellor attempting to fill a blackhole adding up to as much as £30billion.

Another source confirmed the fiscal statement had been rewritten since the first set of measures by Ms Reeves was sent to the OBR – the UK’s fiscal watchdog – earlier this month.

Those briefed on the revised plans said Ms Reeves would now have to rely on what has been dubbed a ‘smorgasbord’ approach – increasing a wide range of narrowly-drawn taxes. Such measures could include a new gambling levy and higher taxes on expensive properties.

The apparent changes come after the leadership crisis that engulfed Sir Keir Starmer this week. However, Downing Street sources insisted the two matters were not connected.

Last night Tory leader Kemi Badenoch responded to Ms Reeves’ reported rethink on income tax by saying: ‘Good. (If true). Only the Conservatives have fought Labour off their tax-raising plans. 

‘But one retreat doesn’t fix a Budget built on broken promises. Reeves must guarantee no new taxes on work, businesses, homes or pensions – and she should go further by abolishing stamp duty.’

It came as economists warned that the number of those paying the 40p tax rate will top 10 million if Rachel Reeves freezes thresholds again.

Almost one in five taxpayers will be dragged into paying 40 per cent or more tax on their income if, as expected, the Chancellor extends the ‘stealth tax’, the Institute for Fiscal Studies said.

Fiscal drag will mean even more of those in middle-class professions such as senior nurses, police officers and teachers pay the higher rate of tax.

For the first time since its introduction, all pensioners will also pay tax on their income from the full state pension in 2027-28 as a result, the think-tank said.

More minimum-wage workers will be pulled into paying tax due to frozen thresholds and substantial minimum wage rises, it added. And it said that a continuing freeze would mean more taxpayers are eligible for Universal Credit at a time when the benefits bill is increasingly unaffordable.

Extending the freeze on thresholds, brought in by Rishi Sunak in 2021, for a further two years until April 2030 would net her £8.3billion that year, according to the think-tank.

This is on top of the £42billion the policy is already expected to raise by 2027-28, when it was due to end.

A real-terms reduction in thresholds would mean anyone paying income tax or NI would see their taxes increase and also mean more taxpayers are dragged into higher tax brackets.

Shadow Chancellor Sir Mel Stride said: ‘Labour need to show some backbone and control spending, not keep raiding family pay packets to cover for their own economic failure.’

Thresholds are usually uprated annually in line with inflation, but rates of income tax have been frozen since 2021.