Chancellor Rachel Reeves has dramatically abandoned plans to increase income tax rates in a major political U-turn, but is preparing at least eight other significant financial measures that will impact households across the United Kingdom.
Major Tax Policy Reversal
In a significant shift, Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer have completely scrapped proposals to raise both the basic and higher rates of income tax. This decision comes amid concerns about potential political fallout and public anger, with insiders confirming the original tax plan has been "rewritten" since Reeves's initial communication with the Office for Budget Responsibility.
The Chancellor had previously written to the OBR confirming that hiking income tax would be among the "major measures" announced in the Autumn Budget on November 26, 2026. However, on Wednesday she informed the budget watchdog of the opposite decision, effectively tearing up the original proposal.
Eight Key Measures Still on the Table
Despite the income tax U-turn, the Treasury is proceeding with multiple other revenue-raising measures to address an estimated £30 billion fiscal hole and maintain fiscal headroom.
Pension Salary Sacrifice Limits
The Chancellor plans to limit the amount of salary that can be sacrificed through pension contributions without incurring National Insurance payments to just £2,000 per year. Currently, there is no limit on these arrangements, and this change could raise up to £2 billion annually.
Stealth Tax Threshold Freezes
Reeves may now focus on freezing or adjusting the thresholds at which people pay tax, effectively creating an income tax rise through stealth without changing the headline rates.
Alcohol Duty Increases
The Budget is expected to include duty hikes on alcohol in line with the Retail Prices Index inflation rate, mirroring last year's 3.6% increase that added up to 54p to bottles of wine and gin.
ISA Allowance Reduction
The £20,000 annual ISA allowance could be cut to between £10,000 and £12,000, with the Treasury reportedly considering a reduction to £12,000 following lobbying from building societies.
Fuel Duty Changes
Motorists face significant increases if the temporary 5p per litre fuel duty cut expires, potentially costing households £7.3 billion by 2029. Meanwhile, electric vehicle drivers could be charged 3p per mile under new road tax schemes from 2028, adding approximately £250 annually.
Council Tax Reforms
Properties in bands G and H could see their council tax rates doubled under proposals from the Institute for Fiscal Studies, though the system remains based on 1991 property valuations.
Mansion Tax Proposal
Homes valued over £2 million may face an additional 1% annual tax on the amount above this threshold, meaning a £3 million property would pay £10,000 extra.
Dividend Tax Increases
Business owners and investors face higher dividend tax rates on investments held outside of ISAs or pensions.
Budget Context and Implications
The Chancellor and Prime Minister are now relying on these smaller tax-raising measures to fill the multibillion-pound gap caused by downgraded productivity forecasts and U-turns on other policies including cuts to winter fuel allowances and disability benefits.
One insider briefed on the proposals confirmed to the Financial Times that the original tax plan had been completely abandoned, while another stated the entire Budget had been "rewritten" since Reeves's first letter to the OBR.
The government appears to be walking a tightrope between necessary revenue generation and political acceptability, with the income tax U-turn demonstrating the sensitivity around direct taxation increases while indirect and stealth taxes proceed.
