London’s blue-chip index – and the pound – have slumped following reports of Rachel Reeves‘s U-turn on Budget income tax plans.

Reports suggest the Chancellor is considering dropping plans to raise income tax in the autumn Budget on November 26. The potential U-turn has renewed concerns about how the Government will fill a fiscal shortfall of up to £35billion. The speculation triggered a sell-off in government bonds, with yields on 30-year gilts jumping 14 basis points to 5.37% in early trading, while 10-year yields rose 12 basis points to 4.56%. Gilt yields rise when their prices fall, and fall when their prices rise. Sterling also weakened, down 0.3% to $1.313 and 0.3% lower at €1.128. The FTSE 100 opened on the back foot, dropping 101.80 points to 9,705.88.

Banks were among the hardest hit, with Lloyds, Barclays and NatWest all tumbling more than 3.5%, while HSBC dropped 1.6%.

Homebuilders also sank, with Barratt Redrow down 3.9%, Persimmon off 3.8% and Berkeley sliding 3.5%. Rolls-Royce dipped nearly 2%.

An expert at Trading Economics said: “Despite recent record highs in 2025 driven by its defensive, value-tilted mix and low tech exposure, the FTSE 100 faced renewed pressure amid fiscal uncertainty.” 

According to the Financial Times, the decision not to raise the tax was communicated to the Office for Budget Responsibility on Wednesday, when the Chancellor submitted a list of “major measures” to be included in her Budget. An income tax rise would help her bridge a fiscal black hole, but it would also break Labour’s clear manifesto pledge not to raise income tax, National Insurance or VAT.

The prospect of a manifesto breach drew criticism earlier this month from Labour’s new deputy leader, Lucy Powell, who said it would damage “trust in politics”.

However, Ben Zaranko, an economist at the Institute for Fiscal Studies think tank, said the decision to back down on tax rises held “considerable risks”.

This included a “greater risk of damaging economic impacts” and that future U-turns could be more likely in future as a result of “lots of angry interest groups”.

The Chancellor is reported to have drafted two separate Budgets, one with major tax hikes and another relying on smaller measures. 

Nigel Green, CEO of global financial advisory deVere Group, said: “This is exactly how credibility shocks begin. 

“Gilts are sliding, borrowing costs are climbing, and sterling is weakening because markets fear the Government is improvising. There’s nothing investors hate more than indecision disguised as strategy.”

He added: “The reaction is unmistakable. Bond traders are telling the Treasury that they will not tolerate mixed signals. They saw what happened during the Truss turmoil, and they’ll not wait politely for clarity. They’re pricing risk in real time.

“When the pound falls alongside gilts, you’re watching international investors turn away from the UK. This shift raises borrowing costs across the economy and increases the risk of a deeper slowdown. Confidence in fiscal leadership is everything in this moment.”