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Rachel Reeves is reportedly set to bring in a new tax on high-value properties in the upcoming Budget after abandoning the plans to hike income tax.
The chancellor could also implement a so-called stealth tax and freeze thresholds for another two years in the measures to be announced on 26 November, according to reports.
Ms Reeves had been expected to breach Labour’s manifesto promises and increase income tax as part of her plans to plug the gap in the public finances. She had hinted as recently as Monday that keeping to the manifesto could mean “deep cuts” to public investment.
Other tax rises are still expected, but the change of heart on income tax is understood to have come after improved forecasting from the budget watchdog, the Office for Budget Responsibility.
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Rachel Reeves has been laying the ground for tax rises over recent weeks (Stefan Rousseau/PA) (PA)
The Times reported on Saturday that the chancellor will extend the freeze on income tax thresholds for two years until 2030, in a move that could raise some £8bn a year for the Treasury.
She could also introduce a new levy on some of the most valuable homes, which would mainly affect properties in London and the South East, according to The Telegraph.
The move would reportedly see 2.4 million of the most valuable properties across council tax bands F, G and H revalued and a new, separate, surcharge applied to 300,000 of them on top of existing council tax bills.
A Treasury spokesperson said: “We do not comment on speculation around changes to tax outside of fiscal events.”
Other tax changes thought to be on the table at the Budget include limits to salary sacrifice schemes and new measures to tax electric vehicles, as the Treasury pursues a “smorgasbord” approach of raising a range of smaller taxes rather than the larger-scale change to income tax.
Despite the U-turn, the chancellor still intends to give herself larger fiscal headroom – the buffer against economic headwinds which could affect government spending plans.
Ms Reeves has been laying the ground for tax rises over recent weeks, including during an early-morning speech on 4 November aimed at preparing people for the budget.
Downing Street said on Friday that the thrust of the speech still stands.
The prime minister’s official spokesperson said: “She was very clear about the challenges the country faces and her priorities in addressing those challenges.
“All of that still stands.”
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A spokesperson for the prime minister has said the thrust of the chancellor’s speech on Friday preparing people for the Budget ‘still stands’ (PA)
The spokesperson refused to comment on Budget speculation, but said the chancellor will aim to “build more resilient public finances with the headroom to withstand global turbulence”.
Government borrowing costs rose on Friday as speculation about the change of direction sparked a sell-off in gilts, but the market later stabilised somewhat as the reasoning behind the Treasury’s decision-making became apparent.
Helen Miller, director of the Institute for Fiscal Studies (IFS) think tank, said it was “not unusual” for chancellors to make last-minute changes to their Budget plans.
She added: “But the news that Rachel Reeves has backed away from a plan to increase the rates of income tax will lead investors to worry that the chancellor will instead increase a range of smaller taxes that can be more damaging to economic growth.
“They may also worry that the change of plans signals that this government are reluctant to do politically difficult things.
“These are the kinds of concerns that can lead investors to demand higher returns when lending to the government.”
If the government does choose to raise a set of smaller taxes, they should also be reformed “so that they do less damage to growth”, the IFS chief said.
