Chancellor Rachel Reeves has reportedly abandoned plans to raise income tax rates in the Autumn Budget later this month after widespread backlash over the decision.
According to the Financial Times, Reeves has “ripped up” proposals to raise the basic and higher income tax rates amid fears it would anger voters.
While Labour had previously pledged not to raise income tax, VAT or national insurance for employees in its manifesto, the Office for Budget Responsibility is expected to downgrade its productivity forecasts ahead of the Budget, which could leave a £20bn hole in the public finances.
Last week in a surprise pre-Budget speech, Reeves refused to rule out tax rises to plug a hole in the public finances, stating that “easy answers” to fix economic issues would be “irresponsible”, leading many to believe that income tax rises could be on the table.
Instead, it is now thought that the government could raise revenue by freezing income tax thresholds, alongside introducing other measures such as changes to capital gains tax, dividend allowances, inheritance thresholds, and pension reliefs.
Earlier this week, the Treasury ruled out changes to tax-free pension lump sum amounts in the upcoming Autumn Budget.
Speculation had been mounting that Chancellor Rachel Reeves will cut or cap the tax-free pension lump sum, which currently allows savers to withdraw up to 25% of their pension pot tax-free, up to £268,275.
Charlotte Kennedy, chartered financial planner at Rathbones, commented: “Reports that the Chancellor is set to abandon plans to raise income tax are jarring, especially after her recent pre-Budget speech seemed to signal an increase.
"The government still has a multi-billion-pound fiscal black hole to plug, and the reported move could put other unsavoury tax changes back on the table. The harsh reality is that taxpayers’ income tax burden is already increasing because of the deep freeze in thresholds, which pushes people into higher tax brackets as their earnings rise.
"With less than two weeks to go until Budget Day, a smorgasbord of ideas is being tested on the public ahead of the fiscal event.
"A recent Rathbones survey of more than 3,000 UK adults revealed that potential changes to pensions, income tax and inheritance tax regimes are the leading concerns ahead of the Budget. Amid the uncertainty, it remains sensible to avoid knee-jerk reactions and irreversible decisions that could undermine your financial resilience."
