Income Tax Decision Shift: Reeves Drops Rise Plan Ahead of Budget

The income tax decision has finally become clear after weeks of speculation. Chancellor Rachel Reeves has decided not to raise income tax rates in the upcoming Budget. Her choice comes after strong hints that an increase was likely.
For weeks, the Budget debate created confusion. However, some details are now confirmed. Earlier this month, Reeves sent the Office for Budget Responsibility a plan that proposed a 2p rise in income tax rates and a 2p cut in National Insurance. This “2 up, 2 down” idea aimed to fill a £30bn gap created by weaker productivity forecasts.
The proposal, created by the Resolution Foundation, would have generated billions from non-wage income, including rental earnings and savings. In addition, stronger wage projections in the latest OBR assessments have now reduced the fiscal gap to around £20bn. As a result, the government has paused the plan to raise income tax rates.

Political Signals and Market Reaction

Reeves suggested earlier in the week that tax rises were possible. Therefore, the reversal surprised many. Health Secretary Wes Streeting later stressed that the government must honour its manifesto. He said the speculation showed how difficult the public finances had become, and that the chancellor remained determined to stay within fiscal rules.
His comments came amid wider political tension. Leadership rumours and claims about influence over financial markets added to the uncertainty. By Friday, the bond markets were unsettled by the shifting signals on income tax.
After reports emerged that the tax rise plan had been dropped, borrowing costs jumped. The 10-year gilt yield rose by 0.12 percentage points. Markets had been encouraged by the chancellor’s tough stance on spending. In addition, expectations of lower Bank of England interest rates boosted confidence. The willingness to take political risks had reassured investors.