Chancellor reportedly rules out move after backlash
Daily Telegraph 13/11/25
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Rachel Reeves has reportedly dropped plans to increase income tax at the Budget.
Sir Keir Starmer and the Chancellor are said to have about-turned on the manifesto-breaking proposals to increase the tax after weeks of mounting speculation.
The apparent reversal comes after Ms Reeves gave a rare pre-Budget speech earlier this month in which she warned everyone “will have to contribute” to improving Britain’s finances.
But suggestions that the Chancellor would increase income tax, breaching a clear manifesto promise, had prompted concerns from backbench MPs about trust in the Government.
The Financial Times reported on Thursday night that the Office for Budget Responsibility (OBR) had been informed of the change of course.
A separate report from Bloomberg suggested Ms Reeves had conducted the about-turn after the OBR said the gap in the nation’s finances was only around £20bn rather than above £30bn.
Lisa Nandy, the Culture Secretary, would not be drawn on the reports but told BBC Breakfast: “As somebody who sits around that Cabinet table, who has discussions with Rachel and has known her for a long time, is that she won’t play fast and loose with people’s money.
“She does take her promises seriously, and she will do everything that she can to make sure that those choices are the fairest possible choices.”
Wes Streeting, the Health Secretary, warned Sir Keir and Ms Reeves they should not break Labour’s manifesto promises at the Budget later this month because of “low” trust in politics and politicians.
He told an LBC phone-in on Friday: “The fact that the Chancellor was reported as even considering breaking manifesto commitments tells you two things. Firstly the public finances are under real pressure and secondly she is ... unequivocally committed to her fiscal rules. And therefore she’s got some invidious choices to make and she’s weighing those up.”
Labour turns to fiscal drag
The Chancellor is said to still be considering looking at income tax thresholds, with a possible extension on the threshold freeze an option for raising revenue.
That would allow the Government to bring more people into higher rates of tax through fiscal drag, a process by which wage inflation pushes salaries up.
The Financial Times also reported that the Chancellor could lower thresholds at which taxpayers start to pay higher rates.
The Institute for Fiscal Studies (IFS) estimates that maintaining the freeze on income tax and National Insurance (NI) thresholds could raise £8.3bn a year.
Freezing the higher rate threshold of income tax of 40 per cent, currently £50,271 a year, would drag a further 790,000 people into the band, according to the think tank.
The freezes on the higher rate and the basic rate - which is 20 per cent for those earning at least £12,571 a year - are expected to raise £39bn a year in 2029-30.
A two-year extension to the threshold freeze would mean the total number of income tax payers will be 960,000 higher than current projections.
The 2024 Labour manifesto promised not to “raise taxes on working people” through increases to “National Insurance, the basic, higher, or additional rates of income tax, or VAT”.
The Chancellor and the rest of Cabinet have repeatedly faced questions in the lead-up to the Nov 26 Budget as to the Labour definition of a “working person”.
It is rumoured that the internal definition is someone who roughly earns up to £45,000 to £46,000.
Earlier this week, the Chancellor gave the strongest hint yet she would break the manifesto promises with an increase in tax.
She told BBC Radio Five Live on Monday: “It would, of course, be possible to stick with the manifesto commitments, but that would require things like deep cuts in capital spending.
“And the reason why our productivity and our growth has been so poor these last few years is because governments have always taken the easy option to cut investment – in rail and road projects, in energy projects, in digital infrastructure.
“And as a result, we’ve never managed to get our productivity back to where it was before the financial crisis... What I promised during the election campaign was to bring stability back to our economy and what I can promise now is I will always do what I think is right for our country.”
The Treasury has not yet responded to approaches for comment regarding the reports overnight.
The market reaction to the about-turn saw the cost of Government borrowing surge higher, with the yield on 10-year gilts climbing 13 basis points at the start of trading to 4.57 per cent.
The FTSE100, the UK’s flagship stock index, also sank at the start of trading, down 1.1 per cent.
Kemi Badenoch, the Conservative Party leader, welcomed reports of an about-turn but added that “one retreat doesn’t fix a Budget built on broken promises”.
Fears of millionaire exodus
It comes after Ms Reeves dropped plans for an “exit tax” on the wealthy over fears it could result in an exodus of millionaires.
The Chancellor had been poised to impose a new levy on entrepreneurs moving their money out of the country in the Budget.
But she has now ruled out the move after accepting that high net worth individuals were likely to flee in large numbers before the charge was implemented.
The climbdown on an “exit tax” will frustrate MPs on the Left of the party who have been calling for more wealth taxes.
A source close to the Chancellor said: “This is a pro-business government which is building on the progress we’ve already made to strengthen the UK’s position as an attractive investment prospect for the best and the brightest across the world.
“Introducing an exit charge would risk signalling that the UK is less welcoming to entrepreneurs and global talent, and that’s not something the Chancellor wants to do.”
As it stands, emigrants can sell their assets in Britain without incurring capital gains tax (CGT), which is set between 18 and 24 per cent.
An “exit” or “settling-up” tax would have forced them to pay the charge if they left the UK, bringing them in line with the current rate of CGT on British residents.
It would have also brought Britain in line with other European countries including Germany, Norway and Belgium, which have all recently imposed more stringent settling-up taxes.
Holding investors to ransom
Ms Reeves was reportedly hoping to raise £2bn from the change, which would have helped fill a £30bn hole in public finances.
However, she has bowed to warnings that the move could prompt business founders to sell up early or avoid launching a company in Britain altogether.
Rumours of an exit tax prompted panic among some of Britain’s most successful start-ups and investors, who said it would hold them to ransom.
Last week, 150 business leaders wrote to the Chancellor to warn her off, claiming the tax would “not only tell founders that their ideas and innovations aren’t welcome, but that they should either get out early or not come at all”.
There are already growing concerns that a large number of wealthy individuals are fleeing the UK, fuelled by Labour’s decision to tighten inheritance tax rules and abolish non-dom status.
Figures from Henley & Partners, an advisory firm, predict that a net 16,500 millionaires will quit Britain in 2025, up from 10,800 last year. It is thought the UAE stands to gain 9,800 millionaires this year, and Switzerland 3,000.
On Tuesday, The Telegraph revealed that Herman Narula, Britain’s richest self-made entrepreneur aged under 40, was preparing to quit the UK for Dubai over the exit tax plans.
Mr Narula, who is the chief executive of the £2.5bn tech company Improbable, called the proposals “irresponsible” and warned it threatened to drive out entrepreneurs ahead of the Budget.
Many wealthy individuals have already left the UK, including Richard Gnodde, Goldman Sachs’s most senior banker outside the US, Nassef Sawiris, the Aston Villa co-owner, and British property tycoon brothers Ian and Richard Livingstone.
The idea of an exit tax had received support from the Resolution Foundation, an influential Left-leaning think tank. Torsten Bell, its former chief executive, is now a minister in the Treasury.
But the decision to hold back will frustrate Left-wing MPs. One figure on the Labour Left told The Telegraph: “The idea that the Budget will tax workers but effectively protect wealth is a long way from the kind of fairness we expect from a true Labour government. Unacceptable.”
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