UK Budget 26 Nov: Reeves drops income tax rate rise

You’ve probably seen the headlines shift overnight: the long‑trailed idea of raising income tax rates is off. Chancellor Rachel Reeves is no longer planning a rate hike for the 26 November Budget after draft figures from the Office for Budget Responsibility (OBR) pointed to stronger wage growth and higher tax receipts. Markets jolted on the news, with gilt yields jumping before easing back. Reuters first reported the U‑turn; the Budget date was confirmed in September.

That doesn’t mean your tax bill can’t rise. The Treasury is still weighing changes to thresholds (the points at which you start paying or move up a band) and a mix of smaller measures. Reporting in the Evening Standard and Scottish Financial News says options on the table include restricting salary sacrifice schemes and new levies linked to electric vehicles, alongside possible moves on gambling taxes.

Let’s quickly recap how this works. Before every Budget, the Chancellor sends policy options to the OBR for independent costing, and the watchdog publishes a five‑year forecast alongside the statement. This month, one option sent for costing was a 2p rise in income tax matched by a 2p cut to National Insurance; it’s now been shelved. The OBR sets out this process - including the ten‑week notice rule - in its public guidance.

Why the change of course? New assessments suggest the “fiscal hole” is smaller than feared. Coverage from Yahoo Finance UK and PA Media (via the Standard) says stronger‑than‑expected wage growth has boosted projected tax receipts, trimming the gap from roughly £30bn to nearer £20bn. That eases pressure on rates, though ministers still talk about “tough choices”.

Here’s the bit many of us feel but don’t always see: fiscal drag. When thresholds stay frozen while pay rises, more of your income falls into tax and higher bands, even if the rates never change. The Institute for Fiscal Studies (IFS) estimates that the existing freezes to income tax and National Insurance thresholds are due to raise around £51bn a year by 2029–30 versus uprating; extending freezes for two more years to 2030 would raise a further £8.3bn. The IFS also projects that by 2029–30, roughly one in four employees could be paying the 40% rate if freezes continue, with about 42.1 million income taxpayers and 10.1 million higher‑rate payers. The Financial Times has reported the “one in four” figure too.

Think about a typical pay rise. If your salary climbs by a few percent a year but the thresholds don’t move, a bigger slice of your earnings is taxed at 20% and, for some, 40%. That’s fiscal drag in action. The IFS notes that freezes don’t just raise more revenue; they also push many people into higher marginal tax rates, which can nudge work decisions.

Now picture a minimum‑wage worker picking up extra hours. Under an extended freeze, someone working roughly 18 hours a week can become liable for income tax because the personal allowance stays fixed while hourly pay rises. That’s why freezes quietly expand the number of taxpayers without touching the rates. The FT and new IFS analysis highlight this shift.

Lowering thresholds - not just freezing them - would raise money faster, but it hits lower‑to‑middle earners hardest because more of their pay is dragged into tax sooner. Paul Johnson of the IFS has warned that threshold cuts bite the low‑paid more, and analysts quoted by Reuters worry that a patchwork of smaller measures can complicate economic signals for the Bank of England.

Politically, keeping rates unchanged helps Labour avoid breaking its 2024 manifesto wording about not increasing the basic, higher or additional rates of income tax, National Insurance or VAT for “working people”. But freezes still lift bills for many, which is why transparency matters. The Institute for Government sets out the exact pledge text and how it constrains tax policy choices.

What should you watch now? Two things. First, the OBR’s final numbers and the full Budget on Wednesday 26 November - they tell us whether thresholds are frozen to 2030, trimmed, or allowed to rise again from 2028–29 as Reeves previously told MPs she intended. Second, market reaction: gilt yields spiked on talk of the U‑turn, a reminder that investors are tracking the UK’s “headroom”. We’ll keep this guide updated so you can read your payslip with confidence.