Chancellor of the Exchequer Rachel Reeves has made a significant U-turn, officially abandoning plans to increase income tax for millions of households across the UK.
Budget Announcement Details
The decision will be formally announced as part of the Budget on Wednesday, November 26. There had been widespread expectation that the Chancellor would raise the basic rate of income tax for everyone earning above £12,570, a move that would have broken a key Labour manifesto pledge made during the election campaign.
However, after a tumultuous period for the Government, which included reports of a significant backlash that could have left its position perilous, plans for what would have been the first income tax hike in decades have now been scrapped.
Breaking a Manifesto Pledge
Ms Reeves had previously stated she was prepared to do "whatever was necessary" for the economy, offering strong hints that an income tax rise was on the table. This stance was in direct contrast to Labour's election promise not to increase taxes on 'working people', which was defined as no rises to income tax, VAT, or National Insurance.
A government rethink has now definitively ruled out such an increase, averting a major political controversy.
Other Tax Changes on the Horizon
While the direct income tax rise is off the table, the Budget is still expected to include measures that will increase the tax burden in other areas. Pensions and properties are among the likely targets for revenue-raising changes.
Furthermore, the existing freeze on income tax bands is expected to be extended. This stealth tax measure means that as people's earnings increase over time, they are pushed into higher tax brackets, resulting in them paying more tax without any change to the official rates.
Aaron Peake, a personal finance expert at the free credit score service CredAbility, commented on the situation. "A freeze on income tax thresholds looks set to stay, meaning millions will continue to pay more tax as wages rise, even if rates don’t," he said.
Peake also highlighted another potential shift: "There’s also talk of raising income tax by 2p and cutting National Insurance by 2p. Workers might break even, but pensioners and landlords could be left worse off as they don’t pay NI."
He added a warning for savers, noting: "The rule allowing savers to take 25% of their pension pot tax-free could be tightened. Popular pension boosting methods like salary sacrifice may also lose some tax perks, pushing up long-term costs for workers planning their retirement."
