Workers face £7.5bn rise in tax despite Reeves U-turn

Rachel Reeves will raise £7.5bn from millions of workers in the budget by freezing tax thresholds, after her decision to scrap controversial plans to raise income tax led to a selloff in the bond market.

- Kiran Stacey Richard Partington Rowena Mason

Government sources said the chancellor had decided to maintain the level at which people started paying income tax for two years, while abandoning plans to raise the headline rate, which would have broken a manifesto promise.

The two-year freeze on thresholds will raise more income tax from workers because inflation and wage growth bring them into higher tax bands. Reeves had been expected to raise income tax by up to 2p, potentially alongside a one-year extension of the freeze in thresholds.

However, her last-minute change in tack came at the end of a turbulent week for the government after Keir Starmer’s allies briefed that he would fight any leadership coup, with some pointing to Wes Streeting, as a challenger - which the health secretary denied. The episode has left Starmer's authority weakened and the prime minister under pressure from MPs not to let the budget worsen Labour's political position.

Reeves had been indicating for weeks that she was prepared to raise income tax for the first time in decades in order to plug a hole in the public finances and reassure the markets that she was committed to fiscal discipline.

Her choice to raise a smaller amount in taxes instead through a broader range of measures sparked a selloff in the markets as investors pushed government borrowing costs higher and the pound lower.

Treasury sources have suggested Reeves is now looking for an extra buffer of £15bn, but that is less than many bond investors had expected, increasing the risk that the budget will be badly received by markets.

The Treasury declined to comment on budget speculation but sources familiar with government deliberations said the decision to switch approach had come after talks between Reeves and Starmer.