Reeves rules out raising income tax rates for this Budget
Chancellor Rachel Reeves has decided not to raise the basic, higher or additional rates of income tax in the Budget later this month, reversing earlier indications that rates would increase. The Financial Times first reported the change of course, which ministers say is partly the result of stronger-than-expected economic forecasts.
Government sources stress that difficult choices remain to close a public finance shortfall of around £20bn. Rather than increase rates, the chancellor is considering alternative measures such as freezing or lowering the income tax and National Insurance (NI) thresholds — the earnings levels where different rates start to apply — and potentially raising other taxes.
Why rates were ruled out (for now)
Before each Budget is finalised, the chancellor submits plans to the Office for Budget Responsibility (OBR) for fresh forecasts on borrowing and growth. Insiders say Reeves submitted her latest measures to the OBR last week. Reports that income tax rates might rise briefly pushed up UK government borrowing costs, although yields eased later as newer reports suggested the fiscal gap could be smaller than previously feared.
Likely alternatives under consideration
Options reportedly under active consideration include:
- Extending the current freeze on income tax and NI thresholds (introduced in April 2023 and due to end in 2028). The Institute for Fiscal Studies estimates that extending the freeze by two years could raise about £8.3bn a year.
- Lowering income tax and NI thresholds, which would raise more revenue than simply extending the freeze and would pull more workers into higher tax bands.
- Targeted new levies, such as proposals reported for a tax on electric vehicles or higher taxes on gambling companies.
If thresholds remain frozen or are lowered, rising wages would mean more people move into taxable bands — for example, the IFS says a two-year extension of the freeze could make a minimum-wage worker liable for income tax after about 18 hours of work a week.
Political context and reactions
Labour's 2024 general election manifesto pledged not to increase taxes on working people, explicitly ruling out rises to National Insurance or the basic, higher or additional rates of income tax. Preserving the rates keeps Labour aligned with that commitment, but pursuing threshold changes or other taxes would still prompt scrutiny from opponents and concern within the party.
Deputy leader Lucy Powell said it was vital the party stood by its commitments. Culture Secretary Lisa Nandy told BBC Breakfast that no final decisions were "set in stone" until the Budget and defended Reeves as careful with public money.
Conservative frontbencher Kemi Badenoch said: "One retreat doesn't fix a Budget built on broken promises," urging guarantees against new taxes on work, businesses, homes or pensions. Liberal Democrat treasury spokeswoman Daisy Cooper said an eleventh-hour reversal could spare struggling families another blow.
A Treasury spokesperson declined to comment on speculation outside fiscal events, adding only that the chancellor will deliver a Budget with "fair choices to build strong foundations to secure Britain's future."
The Budget will reveal Reeves's final decisions and how the government plans to address the roughly £20bn shortfall while meeting its fiscal rules.
