The proposal, never officially confirmed but widely expected, had sparked criticism from across the political spectrum. It was considered a direct threat to Labour’s 2024 manifesto promise not to raise income tax, national insurance or VAT. Sources indicate the decision was communicated to the Office for Budget Responsibility (OBR) midweek, effectively removing any income tax increases from the fiscal roadmap set to be unveiled on 26 November.
Income Tax Rise off the Table after Mounting Internal Dissent
Initial drafts of the Budget 2025 had included plans to raise basic and higher rates of income tax, according to multiple reports cited by The Financial Times and The Times. The move, intended to address a fiscal shortfall estimated at up to £30 billion, was met with considerable resistance from Labour backbenchers and voters alike, prompting the reversal.
At the heart of the decision was the party’s desire to avoid breaching public trust. In an earlier statement to BBC Radio, Reeves had admitted that honouring the manifesto commitments would require “deep cuts in capital spending”. However, the backlash that followed signalled a potential political miscalculation. According to The Times, some Labour MPs warned that any increase in income tax could spark a crisis in confidence within the party’s ranks.
Deputy Labour leader Lucy Powell had previously cautioned that breaking tax pledges would damage “trust in politics”. While Reeves had hinted at the possibility of raising taxes in a news conference, party insiders told Sky News the mood changed drastically after internal briefings highlighted the risk of alienating key voter blocs.
The Treasury has so far declined to comment on the reports, but officials familiar with the process confirmed to Reuters that the plan to raise income tax was “effectively discarded” earlier this week. The decision comes amid growing pressure on Labour to balance fiscal discipline with political credibility.
Focus Shifts to Alternative Revenue Measures as Fiscal Gap Remains
Although the income tax proposal has been dropped, the government still faces the challenge of filling a multi-billion-pound shortfall. With borrowing constraints and an explicit refusal to return to austerity-era cuts, Reeves is reportedly pursuing a “smorgasbord” of more targeted fiscal measures.
According to The Times, potential revenue-raising options now include extending the freeze on income tax thresholds beyond 2028, a move often described as a “stealth tax”, and introducing new levies on high-value properties or gambling operations. Proposals for a charge on limited liability partnerships, previously expected to generate £2 billion annually, have also been abandoned after Treasury modelling showed it would cost more than it raised.
Another proposal under review is a “settling-up” charge targeting the assets of UK residents relocating to low-tax jurisdictions. Though still under discussion, concerns about its potential effect on foreign investment, especially in tech and AI sectors, may lead to its withdrawal, according to internal government sources cited in The Times.
Meanwhile, political opponents seized on the U-turn to criticise Labour’s fiscal approach. Conservative leader Kemi Badenoch described it as “a retreat that doesn’t fix a Budget built on broken promises”. Daisy Cooper, deputy leader of the Liberal Democrats, called the shift an “11th-hour screeching U-turn”, while urging the government to consider a windfall tax on bank profits.
While the Budget itself has yet to be finalised, the decision to remove income tax hikes reflects the delicate balance Labour must maintain, between fiscal responsibility, manifesto integrity, and electoral strategy.
