UK Bonds, Stocks Slide After Rachel Reeves Income Tax U-Turn

Key TakeawaysOvernight reports of policy change surprise markets, leading to gilt selloff in 10- and 30-year maturities.The policy reversal indicates the prime minister’s waning authority, Morningstar senior economist says.Despite the climbdown on income tax, further tax increases and changes are expected at the Nov. 26 Autumn Budget.

UK markets reacted negatively to reports that the government has reversed planned income tax hikes at the Autumn Budget, raising questions over the UK’s fiscal position ahead of the crunch fiscal statement on Nov. 26.

Gilt prices fell across a range of maturities, but the initial selloff was focused on longer-dated bonds. After a few weeks of softening in bond yields, 10- and 30-year yields spiked on Friday before dropping back. The 10-year gilt yield moved above 4.50% on Friday morning, a rise of 10 basis points at one stage. As bond yields move in inverse directions to prices, a fall in a government bond’s price pushes up yields.

Morningstar’s senior economist, Grant Slade, says this likely policy U-turn now means the UK government needs to look at alternative measures to fill the “black hole” in the public finances.

“The tweaking of income tax thresholds, among other measures, are now reportedly under consideration to plug the hole in the UK’s public finances. Evidently, Starmer’s lack of authority over the Labour Party has forced the government once again into a budgetary U-turn.”

Slade adds that gilt markets are now pricing in a higher probability that the government’s fiscal rules will be less “iron-clad” than the chancellor says.

The UK FTSE 100 index traded down 1.28% at mid-morning in line with broader European stock markets, with banks, insurers, and commercial property stocks the biggest fallers. The pound briefly fell against the US dollar and euro before recovering to higher levels.

Autumn Budget Coverage

Why Has the Chancellor U-Turned on Income Tax Rise?

According to reports, The Treasury is rolling back on an earlier-reported plan to increase the headline rates of income tax.

While this decision would have breached the Labour Party’s 2024 election manifesto pledge not to raise income tax on working people, the planned move had at least gone some way to convincing the UK’s already-jittery bond traders that the government was taking its fiscal challenges seriously.

For her part, the chancellor, Rachel Reeves, has faced a torrid year of economic and fiscal uncertainty, and was forced to rewrite the UK government’s finances at the end of March to ensure the government was on track to meet its “non-negotiable” fiscal rules of balancing day-to-day spending and revenue by 2029/30.

As a result of the Spring Statement, the government had around £10 billion of “fiscal headroom” by the end of the period.

Since then, however, government borrowing has repeatedly come in above expectations after previous U-turns on welfare cuts. Rising gilt yields mean the cost of government borrowing has increased to more than £100 billion a year.

The UK’s productivity forecasts and gross domestic product performance have also been poor, with latest figures from the Office for National Statistics this week revealing the UK economy grew just 0.1% in the third quarter of 2025—and contracted 0.1% in September.

Nevertheless, the government insists improved fiscal forecasts aid its ability to deliver a less tax-heavy Budget, with new reports suggesting the gap in the government’s finances of £30 billion has fallen to just over £20 billion.

The developments also come following a week of political drama on Downing Street, during which certain of the prime minister’s closest allies were embroiled in accusations of infighting and plotting against him. The prime minister’s personal approval ratings look poor.

In a recent YouGov poll conducted on Nov. 12, 51% of respondents said the prime minister, Keir Starmer, should resign, while 27% said he should remain as Labour leader and prime minister.

Will Rachel Reeves Increase Other Taxes at the Budget?

Despite the expected climbdown on income tax increases, the government is still expected to raise a range of taxes at the Nov. 26 Autumn Budget.

“Fiscal tightening must be designed in a way that minimizes the near-term drag on growth. That argues for tax increases rather than spending cuts to welfare or investment, which tend to have higher multipliers—and are politically fraught in any case,” says Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management.

“Ideally, Reeves would seize the moment to simplify the tax code, improving efficiency and encouraging investment. More likely, however, the Budget will feature a patchwork of modest revenue-raisers: higher gambling and other ‘sin’ taxes, tweaks to income tax bands, and perhaps a levy on the income that banks earn from reserves held at the Bank of England—the so-called QE-reserves tax.

“Together, such measures might just be enough to satisfy the fiscal rule, though more contentious options, such as changes to inheritance tax, cannot be ruled out.”

James Gard contributed to this story