Chancellor Rachel Reeves has dramatically reversed plans to increase income tax rates in the upcoming budget on November 26, a move that would have been the first such rise since 1975. This significant U-turn occurred amidst intense internal government debate and political pressure, particularly concerning Prime Minister Keir Starmer's leadership and a potential backlash over breaking key manifesto pledges. Initially, Reeves had hinted at difficult choices, including potentially breaching manifesto commitments to address a projected fiscal gap of £20bn-£30bn.

The official justification for abandoning the income tax hike was attributed to slightly less bleak forecasts from the Office for Budget Responsibility (OBR), indicating a financial shortfall closer to £20bn, partially mitigated by stronger wage revenues. However, many government insiders and economic analysts contend that political motivations played a crucial role. Concerns about exacerbating political turmoil surrounding Starmer's leadership, including a rumored challenge from Health Secretary Wes Streeting, and avoiding a politically damaging breach of manifesto promises were widely cited as key factors. Some experts even cynically suggested that the initial public hints of a tax rise might have been a deliberate strategy to temporarily reduce government borrowing costs just as the OBR was preparing its forecasts, a claim denied by officials.

Despite the U-turn, Reeves still faces the formidable challenge of finding substantial funds, reportedly up to £40bn, to rebuild the government's financial 'headroom' after previous policy backtracks. She is now expected to pursue a 'smorgasbord' approach, relying on a combination of alternative revenue-raising measures. These options include:

• Freezing Income Tax Thresholds: Extending the existing freeze on income tax thresholds, initially implemented by Rishi Sunak in 2021 and extended by Jeremy Hunt, for another two years until April 2030. This 'stealth raid' is considered highly probable and could generate between £7.5bn and £8.3bn annually by pulling millions more taxpayers, including middle-class professionals and even all pensioners by 2027-28, into higher tax brackets. There is even speculation about cutting thresholds in cash terms, which would represent a major escalation.

• Pay-per-mile Charge for Electric Vehicles (EVs): Implementing a charge of approximately 3p per mile for EV drivers. This measure aims to offset the anticipated decline in fuel duty revenue as more motorists switch to electric vehicles.

• Raising Taxes on Gambling: An increase in gambling taxes, with proposals ranging up to £3bn annually, has been advocated by figures like Gordon Brown and various think tanks to help fund measures against child poverty.

• Cutting Pensions Tax Relief through 'Salary Sacrifice' Schemes: Levying National Insurance Contributions (NICs) in full on these schemes, which allow employees to reduce their headline salary in exchange for higher employer pension contributions, could raise up to £4bn a year. However, this could raise questions about its impact on incentives for retirement saving.

• Doubling Council Tax for Properties in the Top Two Bands (G and H): To address the perceived regressiveness and unfairness of the current council tax system, which is based on 1991 valuations, a doubling of rates for the most valuable properties could yield £4bn annually. This would likely be a controversial move.

• Reforming Capital Gains Tax (CGT): Cross-party experts have recommended changes to make CGT more progressive, such as a 'settling up tax' for high net worth individuals who leave the country, potentially raising up to £2bn.

The U-turn provoked a negative reaction in financial markets, with UK bond markets (gilts) taking fright and the cost of government borrowing rising. The yield on 10-year government bonds jumped, and the pound weakened against the US dollar, reflecting investor unease and concerns about a potential 'credibility shock' due to perceived indecision and mixed signals from the government. Economists and analysts criticized the chaotic handling and public nature of the budget discussions, warning against prioritizing party consolidation over fiscal credibility.

Internally, the U-turn fueled infighting within Labour, with blame being directed at Treasury minister Torsten Bell and No 10 chief of staff Morgan McSweeney. The incident underscored divisions and highlighted the precariousness of Keir Starmer's position following a decline in approval polls and internal challenges. The budget decisions are being made against a backdrop of challenging economic indicators, including unemployment hitting a four-year high and GDP flatlining in the third quarter. The Chancellor and her Cabinet are reportedly deeply divided, with Reeves having prepared two distinct budget options: one that openly broke manifesto pledges and another that skirted around them, ultimately opting for the latter.