Rachel Reeves will introduce a new levy on middle-class homes in the Budget as she finalises plans to raise £25bn to shore up the country’s finances.

The Chancellor is preparing a £600m surcharge on hundreds of thousands of high-value homes that will mainly hit families living in London and the South East.

Details of the proposals emerged after Ms Reeves abandoned a plan to raise income tax, with the Treasury now instead expected to extend the freeze on thresholds and launch a series of other smaller tax raids.

The Telegraph understands the Treasury will use the existing council tax system to revalue 2.4 million of the most valuable properties across bands F, G and H over the next few years – representing one in 10 English homes.

It is understood that a new, separate surcharge on top of existing council tax bills will then be applied to 300,000 of the most valuable properties across the top three bands.

It was unclear last night exactly which homes would be affected, leaving millions of homeowners facing years of uncertainty in a move that experts warn could freeze the property market.

While Labour insiders have framed this as a “mansion tax”, the levy will hit a share of the 1.3 million middle class families living in band F properties across England.

These families now potentially face annual levies of hundreds of pounds on top of existing council tax bills averaging £3,293, while the majority of the over 150,000 homeowners living in the most valuable properties face paying thousands of pounds more each year.

Sir Mel Stride, the shadow chancellor, has accused Labour of engaging in “a class war against middle England”.

He said: “If Starmer and Reeves decide to introduce a new tax raid on family homes, they will be punishing aspiration and hitting hard-working people.

“Under Labour, nothing is safe – not your job, your home, your savings, or your pension.”

Telegraph analysis of official data shows 26 of England’s 296 local authorities will see more than a quarter of homes revalued under the proposals, with over 15pc of all homes in London and the South East in the scope of higher taxes.

More than 65,000 band F, G and H homes in Buckinghamshire would face revaluation, along with 59,000 in Westminster and 46,000 in Kensington and Chelsea.

The Chancellor has insisted she will make “fair” choices to balance the books and get debt down – with landlords, salary sacrifice schemes and other asset owners firmly in her sights, alongside a widely expected increase in gambling duties.

However, Ms Reeves dropped plans to raise income tax after a week of political chaos that began with the Chancellor signalling that Labour would break its manifesto pledge not to raise the main rates.

Treasury insiders claimed the Chancellor dropped the plan after being told it would not raise as much money as expected.

The Chancellor told the Office for Budget Responsibility (OBR) last week that she wanted to increase income tax rates by 2p in the pound and lower National Insurance rates by 2p.

The proposal would have explicitly broken the Labour election manifesto, but was deemed by Treasury insiders to be the best way to fix the public finances in the Budget, raising an estimated £6bn.

But the OBR concluded it would not generate as much money as expected, sources said.

Treasury officials formally told the OBR that income tax rates will not rise on Wednesday, the final day for confirming major measures before the Nov 26 Budget.

It came on the same day that fears of a leadership coup prompted Downing Street to brief that Sir Keir Starmer would fight any challenge.

Financial markets were thrown into disarray on Friday after it emerged that Ms Reeves had abandoned the raid.

The cost of government borrowing jumped, with the yield on 10-year gilts climbing 0.13 percentage points at the start of trading to 4.57pc.

Meanwhile, the FTSE 100, Britain’s benchmark share index, sank 1.1pc.

There had been speculation that Ms Reeves would be forced to raise taxes by as much as £40bn to balance the books.

However, stronger wage growth and higher tax receipts have helped to mitigate the impact, leaving her with a £25bn gap that will be partly closed through spending cuts.

The Chancellor is also banking on the OBR giving her credit for cutting red tape and going further and faster on planning reforms.

In a rare pre-Budget boost, Ms Reeves’s tax and spending watchdog handed Ms Reeves a £1.7bn lifeline to balance the books after it disclosed it had updated its forecasts to take into account lower borrowing costs.

In a highly unusual move, the Office for Budget Responsibility (OBR) said “exceptional circumstances” meant it had shifted the window used to determine borrowing costs over the next five years by 11 days, ensuring that officials took into account a recent drop in gilt yields.

Ms Reeves is now seeking to raise around £25bn to plug a hole in the public finances and build a bigger buffer of around £15bn to guard against future financial shocks, up from £9.9bn today.

Economists have long said that England’s council tax system is regressive because it is still based on property values from 1991. This means that people living in smaller homes often pay proportionally more in tax than those in larger properties.

Buckingham Palace, a band H property in Westminster, has often been cited as an example of a property that incurs an annual council tax bill of £2,034 – less than a typical semi-detached three-bedroom property in Kendal, Cumbria.

London property prices have also raced ahead of those outside the capital, although Labour is also keen to address disparities within council areas.

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Downing Street is understood to have explored a number of options for raising property taxes following a review commissioned by Minouche Shafik, Sir Keir’s chief economic adviser.

Options included a full revaluation of properties in a council tax system that has not been overhauled in more than three decades. However, this has been ruled out.

While using existing council tax bands as the foundation of a new levy is seen as the most simple way to base the new tax, it is understood that the Treasury is keen to design a mechanism that ensures extra revenues flow into the Exchequer, and not cash-strapped local authorities, which collect council tax.

A separate surcharge is therefore currently seen as the most efficient way to collect extra money, although sources insisted that details had not yet been ironed out and could still change as they were not part of the “major measures” submitted to the OBR this week.

Another source insisted that higher property taxes were “nailed on” at the Budget.

The Telegraph also understands the new levy would not be brought in until 2028, allowing time for homes to be reassessed by the Valuation Office Agency.

Ms Reeves will allow homeowners to defer paying the new tax until they move house or after they die amid concerns that people living in small-but-expensive properties could be forced out of their homes.

A Treasury spokesman said: “We do not comment on speculation around changes to tax outside of fiscal events.”

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