CHANCELLOR Rachel Reeves is set to hit working people with a stealth tax after she dramatically axed plans to raise income tax today in a screeching U-turn less than two weeks from the Budget.

She is expected to announce a £7.5 billion tax rise by freezing the level at which people start paying income tax for two years on November 26 instead.

PM Sir Keir Starmer and Ms Reeves took the last-minute decision amid concerted pressure from senior Labour MPs. 

They had spent weeks laying the groundwork for announcing the manifesto-breaking income tax hike with the Chancellor hinting as recently as Monday that not imposing the hike would lead to “deep cuts” to public investment in the face of a massive gap in her spending plans.

But officials claimed today that the change had been made because forecasts showed Ms Reeves’s fiscal black hole was closer to £20bn than £30bn, allowing her to take less radical steps to raise money.

Andrew Fisher, who was head of policy for Jeremy Corbyn when he was Labour leader, branded the new plan a “stealth tax” that hits lower and middle incomes.

He said: “The proposal seemed to be raising income tax rates but offsetting with a National Insurance cut to protect low and middle incomes.

“Now the plan seems to be to freeze income tax thresholds which hits lower and middle incomes — make it make sense!

“Also there is nothing remotely honest about pledging not to raise income tax, and then freezing the threshold so that people pay more income tax.

“Stealth tax rises are probably more damaging to trust than openly and honestly arguing for clear rises.”

Socialist Campaign Group of Labour MPs secretary Richard Burgon said: “Raising income taxes on working people would have been totally wrong, so it’s welcome if that’s been dropped. 

“But there must be no other proposals that leave ordinary families paying higher taxes. 

“The real solution we need is to tax the ultra-wealthy, not those already struggling with the cost-of-living crisis. 

“It is only right that those who’ve done so well out of our rigged economy in recent years are the ones who face any tax rises.”

The Treasury declined to comment on Budget speculation but sources familiar with government deliberations said the decision to switch approach had come on Wednesday after talks between Ms Reeves and Sir Keir.

The U-turn, first reported in the Financial Times, sparked a sell-off in the markets as investors pushed government borrowing costs higher and the pound lower.

A spokeswoman for Momentum added: “The government is embroiled in chaos of its own making.

“By adopting a pro-austerity fiscal framework and refusing to tax the rich, they have forced themselves into attacks on living standards which are morally and politically untenable.

“Time to tax the rich and genuinely end austerity.”

Scottish Labour leader Anas Sarwar urged Ms Reeves today to scrap the two-child benefit cap when she announces her Budget.

Speaking in Glasgow, he said that he wanted to ensure the Budget would not see a return to austerity, with one that reduced energy bills and tackled child poverty — which he said could be done by ending the cap.

Opposition politicians, including the SNP-run Scottish government, have long derided the cap, with mitigation measures set to come into force north of the border early next year.

Scotland’s Finance Secretary Shona Robison said the Budget process had “descended into complete chaos” as she pushed for a meeting with the Chancellor.

Downing Street declined to comment on reports that the Chancellor has U-turned on plans to raise income tax, but insisted that Ms Reeves “has been clear on the need to deliver stability in the public finances. 

“As she said last week, one of the objectives of the Budget is to build more resilient public finances with the headroom to withstand global turbulence.

“And in two weeks’ time, the Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.”