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Maxine Kelly, Josephine Cumbo and Philip Georgiadis in London

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FT Reporters

UK government bonds slide on tax U-turn

UK government bonds sold off steeply on Friday as investors balked at an expected U-turn by Sir Keir Starmer and Rachel Reeves on plans to raise income tax rates in this month’s Budget to fill a hole of up to £30bn in the public finances.

The FT reported on Thursday night that the prime minister and the chancellor had ditched earlier proposals to break their manifesto pledge and raise the basic and higher income tax rates amid fears of a backlash from voters and some Labour MPs.

A sell-off in the gilt market on Friday pushed the 10-year yield up 0.1 percentage points to 4.54 per cent in early trading. Yields move inversely to prices.

The move put gilts on track for their worst one-day sell-off since investors fretted over the future of the chancellor in early July.

The pound was down 0.5 per cent against the dollar at $1.312 and hit a fresh more than two-year low against the euro.

Instead of raising income taxes, the chancellor could cut the thresholds at which people pay different rates. Reeves had already been expected to extend an existing freeze on personal tax thresholds.

People familiar with the matter said Reeves would also rely heavily on what has been dubbed the “smorgasbord” approach of increasing a range of narrowly-drawn taxes.

The U-turn comes days after a leadership crisis threatened to engulf Starmer’s premiership and forced health secretary Wes Streeting to deny he was challenging the prime minister.

However, Downing Street officials insisted the Budget had not been rewritten in response to the briefing debacle.

Maxine Kelly in London

Threshold cut would bring ‘significant’ drop in workers’ pay, says economist

Paul Johnson, an economist and former director of the IFS, said a cut to income tax thresholds would bring “significant changes in take-home pay” for workers. 

Johnson told BBC Radio 4’s Today programme that the hitherto freeze in the thresholds at was already going to take the number of employees paying the higher rate of tax to one in four, from one in 10, saying that not raising the income tax thresholds in line with inflation “hits lower income people a little bit more”.

He added that if the mooted option of cutting those thresholds in the upcoming Budget was implemented, “you start to see those really quite significant changes in take-home pay.” 

Sam Fleming in London

Treasury tries to calm markets

The Treasury sought to calm markets on Friday morning in a response to the FT’s story, saying the Chancellor will deliver a budget that “takes the fair choices to build strong foundations to secure Britain’s future.”

It pointed to previous words from the chancellor vowing to “build more resilient public finances — with the headroom to withstand global turbulence”.

The chancellor has said this would give business the confidence to invest and leave the government freer to act when the situation calls for it.

Emily Herbert in London

Pound dips as investors digest Reeves’ change of tack

The pound fell on Friday morning as investors digested the government’s change of course on income tax.

Sterling was down 0.4 per cent against both the dollar and the euro, taking it to a more than two-year low against the latter.

Line chart of € per £ showing The pound is at the lowest level against the euro for more than 2 years

Tommy Stubbington in London

UK stocks fall at the open

The tax U-turn is also hitting UK stocks on Friday morning.

The FTSE 100 fell 1.1 per cent in early trading, a bigger drop than other European indices. Banks led the declines, with Lloyds and NatWest both down roughly 4 per cent.

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