Chancellor Rachel Reeves has recently unveiled Labour’s first Budget since 2010, following the party’s significant victory in the general election held in July. This Budget is notable not only for the policies it introduces but also due to the considerable decisions around taxation and public spending it encompasses. At its core, it outlines a strategy that includes a £40 billion increase in taxes aimed at bolstering the NHS and other essential public services. This overview seeks to clarify the main elements of the Budget and their implications for the public and businesses.
In the realm of personal taxes, Reeves confirmed that the rates of income tax, National Insurance, and VAT will remain unchanged for the forthcoming fiscal year. Interestingly, the thresholds for income tax bands are set to rise in line with inflation post-2028, thereby mitigating the potential of a greater number of individuals falling into higher tax brackets as their wages increase. However, a significant shift entails the increase of capital gains tax on profits from share sales: the basic rate will rise from 10% to 18%, while the higher rate will jump from 20% to 24%. Furthermore, changes to inheritance tax are notable, as the existing threshold freeze has been extended to 2030, and from 2027, unallocated pension pots will also be taxable.
Moving onto business taxes, some dramatic shifts are underway. Companies will see their National Insurance contributions increase significantly to 15% on salaries over £5,000, up from the previous rate of 13.8%, which is expected to yield an additional £25 billion annually. In parallel, the employment allowance, helpful for small businesses in reducing their National Insurance liabilities, is set to double from £5,000 to £10,500, providing some relief to smaller enterprises amidst the tax hikes. Additionally, private equity managers will face increased taxation, with rates on profits from successful transactions rising from up to 28% to up to 32%.
The Budget also addresses wages, benefits, and pensions. A notable adjustment is the increase in the minimum wage for individuals over 21, which will rise from £11.44 to £12.21 per hour starting April 2025. For younger workers, rates for 18 to 20-year-olds will also see an increase from £8.60 to £10. These changes signal a move toward a more significant increase in earnings for the lower-paid segments of the workforce. Additionally, state pensions will rise by 4.1% due to the “triple lock” system, which promises higher annual increases based on various metrics.
In terms of transport, significant changes are being introduced that primarily focus on supporting public transport users and reducing fuel costs. The fluctuating fuel duty—a reduction initially brought in by the Conservatives—now has an extension until April 2025. However, bus fares are set to increase from £2 to £3 starting in January. The Budget also insists on funding for the HS2 high-speed rail project and addresses essential repairs to transport infrastructure with an additional £500 million allocated to repair potholes.
An equally vital component of the Budget addresses drinking and smoking. From October 2026, a new flat-rate tax of £2.20 per 10ml of vaping liquid will be instituted, signifying a broadening of the tax base on vaping products. Moreover, taxes on tobacco will rise by 2% above inflation and will increase more substantially for hand-rolling tobacco. Alcohol duties will see a nuanced presentation, with increases tied to general inflation metrics.
The government’s approach to spending is equally revealing. Budget allocations for the NHS and education in England will rise by 4.7% in real terms, while defence spending will see a substantial increase of £2.9 billion next year. The Home Office’s budget, on the other hand, is set to shrink due to expected savings stemming from reforms in the asylum system.
Housing has also become a central theme in this Budget, particularly with anticipated rent increases for social housing providers and adjustments in the thresholds for paying stamp duty. This includes changes for first-time buyers and alterations to the existing Right to Buy scheme, which could impact home ownership and affordability going forward.
The outlook for UK growth, inflation, and debt predicts cautious optimism, with the Office for Budget Responsibility forecasting modest growth rates and inflation. This Budget is an ambitious undertaking by Rachel Reeves, aiming not only to address immediate financial necessities but also to lay down a foundation for future economic stability, with varied impacts across different sectors and communities.
In summary, this Budget represents a critical moment in the UK’s economic policy landscape, balancing the needs for increased public sector funding amidst a backdrop of significant tax reform, and sets a course that will shape the future interactions between government, the economy, and the individual citizen.
