Keir Starmer is battling to get a grip on the crisis that has engulfed his government, with his deputy prime minister Angela Rayner forced to step down after breaching the ministerial code over her tax arrangements.

The prime minister brought forward a major cabinet reshuffle in an attempt to restore order and get back on the front foot after a damaging few days, with Yvette Cooper, David Lammy and Shabana Mahmood all moved to prominent new roles.

However, the fallout from the controversy over Rayner, who as housing secretary underpaid about £40,000 stamp duty on her seaside flat, is likely to further damage Labour’s already battered reputation, as it struggles to take on the challenge from Reform UK.

With Rayner standing down from all three of her roles – which also included deputy leader of the Labour party – Downing Street is now braced for a bruising internal party contest to replace her, which frustrated MPs could use to try to force Starmer into a change of direction.

It comes days after Downing Street attempted a reset after a difficult summer recess, during which Nigel Farage and migration policy dominated the headlines, and before a tough autumn during which Rachel Reeves, the chancellor, is expected to raise taxes to balance the nation’s books.

In his ruling, the ethics watchdog Sir Laurie Magnus found that Rayner had “acted with integrity and with a dedicated and exemplary commitment to public service” but concluded she had breached the ministerial code over her tax affairs.

In her resignation letter, Rayner said she “deeply regrets” her decision not to seek additional specialist tax advice over her purchase of the property in Hove, East Sussex, earlier this year.

She said she also had to consider the “significant toll” that the media pressure was taking on her family, despite her journey from “a teenage mum from a council estate in Stockport” to the highest levels of government being “the honour of my life”.

In his handwritten response, which he signed off “with very best wishes and real sadness”, Starmer said that Rayner would “remain a major figure in our party” and “continue to fight for the causes you care so passionately about”.

But her departure leaves the Labour government without one of its most authentic – and powerful – working-class voices at a time when it is struggling to reconnect with its traditional voter base and trailing Reform UK in the polls.

At his party conference in Birmingham, Farage said Rayner’s actions “scream of entitlement” and predicted that Labour’s deputy leadership contest could lead to a split in the party and there was “every chance” of a general election in 2027.

In an attempt to regain control of the chaos, and to divert attention from Rayner’s departure, Starmer held a cabinet reshuffle planned for later in the autumn, moving a dozen ministers to new roles and sacking just two more.

Yvette Cooper became the UK’s new foreign secretary, and was replaced at the home office by Shabana Mahmood, meaning that three great offices of state are, for the first time, held by women. David Lammy moved to the justice department and will also become deputy prime minister.

Mahmood, who has impressed across Westminster for her political skills and policy grip to the extent she is now regularly tipped as a future Labour leader, will now play a significant role in the government’s survival as she battles to get a grip of small boats and asylum hotels.

The hand of Morgan McSweeney, the prime minister’s chief of staff, was seen across the reshuffle. Labour figures suggested it was a further move to the right. With the departure of Rayner, Ed Miliband, the energy secretary, becomes one of the few cabinet members on the party’s soft left still in post.

Pat McFadden, the chancellor of the duchy of Lancaster, is to take over Rayner’s housing and communities brief as part of a revamped, growth-based department also taking in the skills remit formerly held by the Department for Education.

In what was largely a shuffling round of jobs between existing ministers, Liz Kendall, who was the work and pensions secretary, has taken over as science and technology secretary from Peter Kyle, who becomes trade secretary. He replaces Jonathan Reynolds, who becomes chief whip.

Steve Reed, the environment secretary, has been moved to cover Rayner’s housing portfolio, a role he held in opposition. Emma Reynolds, formerly a junior Treasury minister who was out of parliament from 2019 to 2024, is promoted to the cabinet to fill Reed’s old job.

Darren Jones, recently appointed chief secretary to the prime minister, also becomes chancellor of the duchy of Lancaster, running the Cabinet Office.

Lucy Powell was sacked as Commons leader, replaced by the former chief whip Alan Campbell. Ian Murray, removed as Scottish secretary, also left government. He was replaced by Douglas Alexander, who served as a minister under Tony Blair and Gordon Brown.

As the prime minister began reshaping his cabinet team, Rachel Reeves, the chancellor, was confirmed as staying in place early on, as Downing Street sought to reassure the markets that the economy was in safe hands.

Wes Streeting, the health secretary, Lisa Nandy, the culture secretary, John Healey, the defence secretary, and Bridget Phillipson, the education secretary, were among the few ministers to stay in their posts.

Rayner had referred herself to the ethics adviser after confirming she would have to pay more stamp duty because she had incorrectly paid the lower rate on the flat in Hove.

She had classified the flat as her only property despite spending much of her time with her children at the family house in Ashton-under-Lyne, Greater Manchester.

Months before the Hove purchase, she had put her stake in the Ashton house into a trust set up in 2020 to manage a payment to one of her sons, who after a “deeply personal and distressing incident” as a premature baby had been left with lifelong disabilities.

Because her son is the beneficiary of that trust and is under 18, Rayner was still counted as having a financial interest in it for tax purposes.

However, when she bought the Hove flat, she declared she did not have an interest in any other property, allowing her to pay the lower stamp-duty rate of about £30,000. The higher rate would have been an estimated £70,000.

Though she claimed to have received written tax advice before completing her purchase, saying she was entitled to pay the lower amount, Rayner’s conveyancer said on Thursday she had not provided any such advice.