Starmer and Reeves abandon income tax increase proposal

Sir Keir Starmer and Chancellor Rachel Reeves have now abandoned the contentious proposal to sidestep their manifesto promise on income tax.

Many thought the Chancellor would turn to raising income tax to cover the budget deficit, as she warned on Monday that without it, it would necessitate severe cutbacks in capital spending.

Insiders say her shift was motivated by fears that hiking income tax bands would stir up discontent in the party and anger the electorate.

Economists said the tax hike could raise up to $65 billion

The OBR has been informed of the change by Chancellor Reeves, who announced a package of “major measures” for inclusion in his 26 November Budget. Previously, economists have suggested that raising income tax could bridge a gap of as much as £50 billion ($65 billion) – but doing so would undermine Labour’s promise on taxation.

In one of her recent addresses, Reeves signaled she might consider an income tax hike, even though she had earlier promised to stick to Labour’s manifesto. On Monday, she told the BBC that sticking to the pledge would force cuts in capital spending, which could harm productivity. However, party members, including Lucy Powell, Labour’s deputy leader, had raised concerns that breaking the manifesto would tarnish confidence in politics.

Now, the FT says Reeves is leaning instead on a “smorgasbord” strategy aimed at raising £30 billion ($39 billion), potentially including a gambling duty and higher property taxes at the top end of the market. It also noted that the chancellor may opt to extend the freeze on income tax thresholds.

Before, the plan under consideration involved a 2p hike in income tax, coupled with a 2p reduction in national insurance, designed to ease the burden on workers and place it on other groups, with economists projecting over £6 billion ($7.8 billion) in revenue.

Reeves ditched plans to impose more charges on lawyers and accountants

Earlier, Reeves also pulled back from a multibillion-pound measure that would have hit lawyers, accountants, and private clinicians. She had intended to introduce changes expected to raise £2 billion ($2.6 billion) annually, about 7% in partnership levy. However, she has since abandoned the plan after the Treasury warned that it would encourage avoidance and reduce overall revenue, especially in the artificial intelligence and tech sectors. Accountancy firms and city officials had also cautioned against the rate. The Treasury estimated it would cut revenue by £400 million ($525 million) in 2029-30.

There is still growing discussion over taxing rich Britons who relocate to low-tax countries. Reeves proposed a 20% tax on their UK assets, but officials worry about its impact on economic growth. Before, she had also suggested introducing the two-child benefit cap to address the issue of child poverty; however, her recent U-turn on income tax has complicated the matter further.

Nonetheless, the UK government still needs to bridge the shortfall. So far, the chancellor has attributed the current slowdown in the economy to Trump’s tariffs, as well as rising inflation and borrowing costs inherited from the previous government. She also blamed the Office for Budget Responsibility, whose downgraded productivity forecasts are expected to create a £20 billion shortfall in her existing plans.

Don’t just read crypto news. Understand it. Subscribe to our newsletter. It's free.