Autumn Budget 2025
Rachel Reeves delivered her second Budget and, despite her record tax raising first Budget, more tax rises were announced.
The Chancellor continues to bemoan the £22 billion ‘black hole’ that she inherited from the previous government, yet the national insurance rise that was brought in from April 2025 was anticipated to plug that by generating £25 billion of additional tax receipts. Despite that, the black hole has increased to £30 billion, so everyone was fearing the worst, not helped by the numerous leaks in the weeks leading up to her statement, a point earning the government chastisement from the deputy speaker.
Given the deficit, tax rises and spending cuts were both indicated, yet on review of the policy decisions, spending is increasing which of course results in an increase in taxes. Many economists will point out that you cannot tax an economy into growth, yet growth is what is desperately required to give people more cash in their back pocket.
The Chancellor was keen to point out the OBR’s upgrading in forecast growth for 2025/26 from 1% to 1.5% but then was silent on the downgrading in growth forecasts for the following four years. Debt is forecast to decrease over the remainder of the parliament, but not until 2029/30. Anyone who has followed Budgets in the past will be well aware of forecast debt reductions a few years ahead, but rarely does that ever come to fruition.
The £30 billion gap increases to £33 billion with the abolition of the two-child benefit cap, so with no real spending cuts, where is she getting the money from?
The policy decisions show she is not getting enough, only achieving a net surplus of £26 billion by 2030/31, largely being generated by a freezing of income tax and national insurance thresholds for a further three years to 2030/31, anticipated to raise £13.3 billion per year by that point.
To make the tax system even more complicated than it is already, new rates are being introduced for property, savings and dividend income. For property and savings income, the tax rates across all levels will be increased by 2%, giving rise to 22%, 42% and 47% rates, whilst dividend rates increase by 2% for only basic and higher rate taxpayers, resulting in rates of 10.75% and 35.75%, maintaining the 39.35% for additional rate taxpayers. Quite why the additional rate taxpayers were excluded from the increase is anyone’s guess, particularly given the Chancellor’s mantra that the wealthy should pay more.
These changes will come in phases, with dividend rates increasing in April 2026, whilst property and savings income tax rates won’t increase until April 2027.
And shame on you should you aspire to own a valuable property, for you shall pay more! This will come in the form of a high value council tax surcharge, ranging from £2,500 for houses valued at £2 million, to £7,500 for those valued over £5 million. Given the vast majority of those houses will be in the South and London specifically, it seems to be a tax on geography, not necessarily wealth. In addition, many will have inherited the properties so may not actually be cash rich, although there will be consultation in the future to consider on whether relief may be available.
Those who sacrifice some of their salary in exchange for additional employer contributions into their pension scheme will be faced with an annual cap of £2,000 before they will be subject to national insurance, because clearly it’s against government policy to save for your retirement in a tax efficient manner.
On top of that, if you want to invest your full ISA allowance of £20,000, you can no longer do so fully in cash, with £8,000 being ring fenced for stocks and shares, because the government knows best on how you should invest your money. However, if you are over 65, you are still entitled to a full £20,000 cash allowance.
Some relief in that other pension changes were not announced, but then they already did enough on pensions last year in bringing them within the inheritance tax net from April 2027.
There was some brief relief in that, having listened to various lobbying, the £1 million business property and agricultural property relief allowance will be transferable between spouses, when the new rules come into force in April 2026, bringing it in line with the nil rate band and residential nil rate band regime.
Back to the bad news, those who wish to sell their company shares to an employee ownership trust will no longer be able to do so tax free, instead incurring an effective 12% capital gains tax rate, which applies with immediate effect. Bang goes the government’s policy of promoting and increasing employee ownership.
And for those that own electric vehicles, a new tax per mile is to be introduced from April 2028 of 3p per mile for pure electric, and 1.5p per mile for hybrid vehicles.
Announced before the Budget was the increase in national living wage by an inflation busting 4.1% for over 21s, 8% for those aged 18-20 and 6% for those between 16 and 18. With unemployment on an upwards trajectory this, combined with the previous increase in employer’s national insurance and the day one rights for employees makes it look likely that it will keep rising.
The Chancellor was keen to promote the UK as the place to do business, improving the reliefs available under incentive schemes such as the EMI employee share option arrangement, or the Enterprise Investment Scheme and Venture Capital Trust opportunities. However, with so many other taxes seemingly forever on the rise, it is questionable whether that really is the case.
The constant squeeze on the higher earners and wealthiest in the country may well come back to haunt her. With the abolition of the non-domiciled regime, many of the wealthiest have already left the country and those top earners that remain have the means to be able to follow suit. Given the top 10% of earners in the UK contribute 60% of the tax receipts, the government needs to be careful to make the UK a place people do not feel persecuted for being successful.
So, with the policy decisions not plugging the gap, the only hope left is for the UK to grow at a faster rate than the OBR are predicting. Yet how can people aspire to help grow the economy by generating more wealth, if that wealth is just going to be taken off them?
Whilst unlike the Grinch, the Chancellor has not stolen all the presents from under the tree, many will feel as though she’s had a good rummage around. With Labour’s support dwindling by the day, she will be praying for a Christmas miracle that, somehow, her announcements and future predicted improvements in public services will give everyone the feel-good factor. The jury (if one still exists) is most definitely out on that.
