Income tax – live: Markets spooked after Reeves U-turn on major Budget tax increase

The Independent’s whitehall editor Kate Devlin reports:

An under-pressure chancellor who does not have to raise income tax after all should be a moment of celebration for a government.

And yet Labour look mired in chaos once again.

Reports of a Budget U-turn have spooked UK investors.

And the Resolution Foundation think tank is warning that “excessive levels of Budget kite-flying risk exacerbating market uncertainty”.

Meanwhile, Labour MPs fear their government is “making even good news look bad”.

And all this more than a week before Ms Reeves even unveils her make-or-break Budget.

UK government bonds and the pound have come under pressure amid reports the Chancellor has scrapped plans to raise income tax at the upcoming Budget.

The speculation sparked a sell-off of government bonds, also known as gilts, with yields on longer-term 30-year gilts up by 14 basis points to 5.37% in early trading, and the yield on 10-year gilts up 12 basis points at 4.56%.

The yield moves counter to the price of bonds.

Sterling was also lower, falling 0.3% to 1.313 US dollars and 0.3% weaker at 1.128 euro.

The Chancellor is reported to have abandoned plans to hike income tax at the Budget because of improved economic forecasting.

Reports overnight suggested a major tax rise was no longer planned for the 26 November financial statement.

The strength of tax receipts has improved the numbers from the Office for Budget Responsibility, according to the PA news agency, allowing for the U-turn.

This is particularly the case on stronger wage performance because the higher wages are, the more tax is paid on them.

A downgrade in productivity is also not been as bad as was first feared.

The latest measures were thought to have been submitted last week, rather than being a knee-jerk response to the turmoil in No 10 this week sparked by a briefing war.

UK borrowing costs have jumped and the pound has dropped after Rachel Reeves’ sensational U-turn on plans to raise income tax at the Budget.

The change by the chancellor triggered a sell-off in UK government bonds, also known as gilts, which are the means by which the government borrows money from private investors.

Ms Reeves had been expected to hike income tax in the face of a yawning gap in her spending plans, hinting as recently as Monday that the alternative would be “deep cuts” to public investment.

But the Financial Times has reported that she has now abandoned introducing those plans at the 26 November Budget over fears they could anger both voters and backbench Labour MPs. Improved economic forecasting has also been cited as the reason behind the move.

The tax rise would break Labour’s election manifesto pledge not to raise income tax, national insurance, or VAT.

Following the reports on Friday, yields on 30-year gilts jumped by up to 14 basis points in early trading, and the yield on 10-year gilts also shot up 12 basis points – rising the most since July. The yield moves counter to the price of bonds, meaning that prices fall when yields rise.

The pound also felt an initial shock as the markets opened, but then started to recover.