Labour set to U-turn on plan to raise income tax

Prime Minister Keir Starmer and Chancellor Rachel Reeves are said to have “ripped up” plans to raise income tax in a major U-turn ahead of the Budget.

It had been widely expected that Reeves would raise the basic rate – the first chancellor to do so since 1975 – in a move that went against a Labour manifesto pledge.

But in a development first reported by the Financial Times, Reeves and Starmer are now set to scrap the plans, fearing a major backlash from voters and mutinous Labour MPs.

On the markets, the yield on 10-year government bonds rose from 5.44 per cent to 5.56 per cent, making it more expensive for the government to borrow.

The chancellor is due to present her Budget later this month on 26 November.

It is understood the Office for Budget Responsibility, the official forecaster, was informed on Wednesday in a submission of “major measures” that the government intends to drop its plan to raise income tax.

Reeves gave a press conference earlier this month in which she appeared to pave the way for tax increases, tearing up a promise in her party’s manifesto not to increase taxes for “working people”.

The decision not to raise income tax would have implications for Scotland, where income tax is devolved.

The Fraser of Allander Institute had predicted a £1bn cut to the Scottish Government’s budget in light of a 2p increase in the basic rate due to a mechanism known as the Block Grant Adjustment, leaving finance minister Shona Robison little option but to raise tax in her budget, which is scheduled for January.

Pressed on whether he planned to raise income tax in Scotland during yesterday’s First Minister’s Questions, John Swinney said: “Obviously there's a lot of talk about tax going on just now and a lot of uncertainty about the UK Government's position, which may well have implications for us.”

A Treasury spokesperson said: “We do not comment on speculation around changes to tax outside of fiscal events. The Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain's future.”