British Chancellor Rachel Reeves delivered her second budget on Wednesday, announcing tax rises amounting to £26 billion after a whirlwind of speculation about which rates she would increase.
Her challenge was to fill a black hole in the public finances and build up a buffer so she does not have to keep coming back for more taxpayers’ cash, without spooking more people into leaving the UK.
If she hit the wrong note, Britons who have set up a new life in the UAE may find even more of their compatriots joining them.
The measures Ms Reeves announced contribute to a tax burden that will rise to an “all-time high” in 2030/31, the Office for Budget Responsibility said.
Many likely changes had already been trailed as the government to test their reception. But those leaks were nothing compared with the “technical error” that led to the entire budget being sent out by accident from the OBR shortly before the Chancellor took to her feet, setting markets in a spin.
One policy which will have a huge impact is the freezing of income tax thresholds, which is set to raise £7.6 billion in revenue by 2030 and increase the number of UK taxpayers.
Which tax changes made the cut?
Mansion tax: A new levy, dubbed the “mansion tax”, was applied to some of the nation's most valuable homes.
Properties across top council tax bands F, G and H will be hit with a surcharge worth an average of £4,500, with the threshold starting at £2 million.
The move left many estate agents unimpressed. Colleen Babcock, Rightmove’s property expert, said: “The property market needs less taxation, not more, to encourage and enable movement. Today’s announcement of a mansion tax could lead to some distortion at the top end of the market.”
Alexander Marcham, managing director at Alvarez & Marsal Tax, said: “Current council tax bandings are still based on 1991 values, which often bear little resemblance to today’s market.
“Delivering this reform as planned would effectively require a full revaluation of every property in the country to 2026 levels – a huge administrative task that likely explains why implementation has been pushed to 2028.”
Before the budget, prime estate agents told The National that the prospect of tax changes for property had affected the market, with some high-end buyers holding off in the hope that stamp duty would be scrapped, while others tried to get deals over the line before any changes come into force.
Tourist tax: Mayors in England are to get powers to charge tourists for staying overnight in their cities, a long-held desire of London Mayor Sadiq Khan. It could be as much as £15 per night if the New York model is followed. Devolved Wales and Scotland already have nightly tourism taxes. Angela Rayner had pushed for such a tax before she resigned as deputy prime minister, and clashed with Ms Reeves on the issue before the latter made an about-turn.
International student tax: Prime Minister Keir Starmer unveiled proposals this year for universities to pay a six per cent tax for international students. This was confirmed in the budget, raising an additional £760 million each year. The international student levy will require providers to pay a flat fee of £925 per international student per year, effective from August 2028.
Universities have warned it will erase the revenue from a fees increase in September, when the maximum rose for the first time in a decade to £9,535. Vivienne Stern, chief executive of Universities UK, had said a student tax would be “beyond disappointing”.
Taxing foreign students will deepen the financial crisis engulfing UK universities, the sector has claimed. There are also concerns that it will damage university towns.
“Many universities may be small in national terms, but they are central to their local economies, particularly outside the UK’s strongest cities,” said think tank Centre for Cities. “National reforms that weaken the sector risk cutting across the government’s ambitions for delivering growth everywhere.”
Salary sacrifice: The Chancellor introduced limits on how much employees can stash in their pensions under salary sacrifice schemes before it becomes subject to National Insurance. She announced a cap at £2,000 a year, which would reduce how much people add to their pension pots and put a dent in take-home pay for those who use the scheme to stay in a lower tax band.
Anything above the new £2,000 cap will incur National Insurance contributions from 2029, a move which has been forecast to raise £4.7 billion in 2029-30 and £2.6 billion in 2030-31. At the moment there is no limit.
Ms Reeves said it was a “pragmatic step so that people, especially on low and middle incomes, can continue to use salary sacrifice for their pension without paying any more tax than they do now”.
Oil: The UK government will allow extraction of oil and gas near existing fields as it looks to expand North Sea production without issuing new licences.
Labour was adamant in the 2024 election campaign that new licences would not be issued for oil and gas extraction.
But warnings from the industry over the implications of fields like Rosebank and Jackdaw being rejected and the knowledge that fossil fuels will form part of the UK’s mix in the coming decades has led to the decision.
Tax for electric vehicles: Fuel duty is to be increased and a 3p-per-mile charge for electric vehicles (EVs) will be introduced.
The Treasury said the 5p-per-litre cut in duty introduced by the Conservative government in March 2022 would only be extended until the end of August 2026.
Ms Reeves announced that from April 2028, drivers of battery electric cars will be hit by a 3p-per-mile tax, while drivers of plug-in hybrids will be charged 1.5p per mile.
She said: “Because all cars contribute to wear and tear on our roads, I will ensure that drivers are taxed according to how much they drive and not just the type of car they own.”
A Treasury consultation document revealed that for electric Vehicle Excise Duty (eVED), drivers of electric cars will be required to estimate their annual mileage and either pay up front or spread the payment across the year.
Drivers will submit their actual mileage at the end of the year, and either make an extra payment or receive a credit for future use.
For most motorists, the mileage will be checked during the annual MOT.
Two-child benefit cap: Ms Reeves insisted she will not “preside over a status quo that punishes children for the circumstances of their birth” as she confirmed the scrapping of the controversial two-child benefits limit.
Ditching the policy will result in an estimated 450,000 reduction in the number of children in poverty and cost around £3 billion at the end of this Parliament.
Labour had been under increasing pressure from anti-poverty campaigners, as well as many MPs within its own party, to end a policy introduced under the Conservatives.
Gambling tax: The Chancellor announced a steep increase in an online gambling tax associated with the “highest levels of harm” across the sector.
Ms Reeves said she was reforming gambling taxes in response to the rise in online gambling, announcing an increase in remote gaming duty from 21 per cent to 40 per cent and on online betting from 15 per cent to 25 per cent. There are no changes for in-person gambling or horse racing.
Business taxes: The Chancellor said she would introduce “permanently lower” business rates for more than 750,000 retail, hospitality and leisure properties.
Ms Reeves said these would be the “lowest rates since 1991” and they will be paid for through higher rates on properties worth more than £500,000, including the warehouses used by “online giants”.
Rail fares: They were frozen, saving commuters on pricier routes more than £300 a year.
Isa reforms: The annual cash Isa limit will be reduced to £12,000. The aim of reducing the limit from £20,000 is to encourage more people to invest their money in stocks and shares instead.
“Someone who has invested £1,000 a year in an average stocks and shares Isa every year since 1999 would be £50,000 better off today … than if they’d put the same money into a cash Isa,” Ms Reeves told the Commons.
Energy bills: The Chancellor said she was taking action to get energy bills down and cut the cost of living, with £150 cut from the average household bill from next year.
Ms Reeves said she would do this by scrapping the ECO (Energy Company Obligation) scheme introduced by the Tories in government, which she claimed had cost households £1.7 billion a year on their bills.
Landlords: Tax rates on property, savings and dividend income will rise by two percentage points.
NHS: Ms Reeves pledged to “renew” the NHS as she confirmed £300 million would be invested in the health service’s technology.
Prescriptions: The cost of an NHS prescription in England will be frozen at £9.90.
Crackdown on benefits fraud: Ms Reeves will seek to raise £1.2 billion by March 2031 by extending a crackdown on fraudulent and mistaken universal credit payments via the targeted case review scheme.
What does it mean?
Economic growth: The Office for Budget Responsibility has increased its forecast for economic growth this year from 1 per cent to 1.5 per cent but downgraded its forecasts for the following four years.
Fiscal headroom: The amount of headroom the Chancellor has against economic shocks has been raised by tax hikes, according to the OBR.
Ms Reeves claimed in the Commons she would “more than double” the fiscal headroom.
The leeway the government has against the Chancellor’s day-to-day spending rule will widen to £22 billion in 2029-30, £12 billion more than in March, the Budget watchdog said.
What was dropped?
Income tax: After a press conference and briefings aimed at preparing the country for a manifesto-busting increase in income tax, it had appeared income tax was going up by 2p in the pound. Ms Reeves then abandoned the idea of becoming the first Chancellor in half a century to take that step.
The measure was dropped from the “hokey cokey budget”, as Speaker Sir Lindsay Hoyle described it, after the Treasury apparently received forecasts from the budget watchdog which were not quite as grim as first feared.
Instead, the Chancellor extended the freeze on income tax thresholds, a move which is set to raise £7.6 billion in revenue by 2030 and increase the number of UK taxpayers.
By not increasing the thresholds she will benefit from a process called “fiscal drag”, where as wages go up people are pulled into paying tax for the first time or into a higher band.
Coupled with an extension to freezing the National Insurance contributions (NICs) secondary threshold, revenues rise to £8.3 billion.
Opting for this change, as opposed to increasing income tax rates, means the Chancellor may have avoided breaking a Labour manifesto pledge not to raise taxes for working people.
Exit tax: There had been talk that a “settling-up” charge would be applied for people choosing to relocate abroad, as the government became alarmed at the number of wealthy people opting to head for countries such as the UAE. Tech entrepreneur Herman Narula suggested it was the final straw in his decision to move to Dubai, adding to his concerns about a lack of UK opportunities for start-up businesses. It now seems that the government has scrapped the plan.
Homes tax: The Treasury had been considering plans to raise money from a new tax on the sale of homes worth more than £500,000.
Government officials were said to be looking at a potential property tax, which would replace stamp duty on owner-occupied homes.
The “homes tax” would have disproportionately affected homeowners in London and the south-east, where properties are more expensive. The average UK house price stands at £282,766, compared with £673,000 in London.
It was thought this tax, covering England and Wales, could help to build a model for local levies to replace council tax in the medium term. However, it appears to have been shelved for now.
