Millions more dragged into paying higher income tax in Reeves’s £26bn Budget squeeze
Millions of people will be forced to pay higher income tax after Rachel Reeves bet her political future on a £26bn tax raid on the middle classes in her make-or-break second budget.
In what he calls a “Labour values” budget, the chancellor has moved to appease the left in his party with a package of measures that includes 43 separate tax increases, according to shadow chancellor Sir Mel Stride, pushing the UK tax burden to its highest level in history.
But he has finally ended the much-criticised two-child benefit cap, which campaigners say will help lift thousands of children out of poverty, and announced a £73 billion boost in welfare spending.
The decision in this Budget to freeze tax thresholds from 2028/29 to help plug a £20bn black hole in the public finances will raise £8bn in 2029-30 and push one in four workers into the top tax band. Another 780,000 people are paying taxes for the first time.
In a wide-ranging budget the chancellor announced a range of measures including:
- Pension contributions under salary sacrifice schemes above £2,000 per year will be covered by national insurance contributions
- Homes worth more than £2 million will face a new ‘mansion tax’, while homeowners will be hit by a 2 per cent tax increase
- The welfare bill is set to rise by £73bn, rising by £9bn to over £400bn by 2030.
- Plan to cut energy bills by £150 as well as freeze rail fares and prescription charges
- And it has found cash for a £22bn safety buffer in case of further economic shocks after being hit by Donald Trump’s tariffs this year
But the plans were not enough to deliver the economic boost the Chancellor had hoped for; The Office for Budget Responsibility (OBR) watchdog cut its economic growth forecasts by 0.3 per cent and said none of its measures had helped improve the figure.
Speaking at a press conference at a London hospital after the budget, Ms Reeves insisted the plans would increase “our economic resilience for the future”.
He said: “I asked everyone to contribute – yes, for the security of our country and the brightness of its future. But I kept this contribution as low as possible by reforming our tax system, making it fairer and stronger for the future.”
He later added: “I realize I’m asking ordinary people to pay a little more, but I’m asking those with the broadest shoulders to pay more. I recognize that this comes at a cost to working people.”
“If you’re asking if this is a budget I want to present today, I would prefer the circumstances were different.”
The Chancellor’s second budget has been described as “the most chaotic budget in memory” due to the number of leaks and U-turns that preceded it. But he was further embarrassed when the OBR accidentally published its decision minutes before he stood to announce his plans. It apologized for the leak and launched an investigation.
Chief among the announcements was the decision to refreeze income tax thresholds until 2031; This means another 920,000 people will be paying the 40p higher rate by then.
The Chancellor accepted this was a breach of his election manifesto promise not to increase income tax, but insisted “everyone must pay their fair share”.
But even Labor-funding union Unison warned that freezing thresholds was “the exact opposite of putting money in workers’ pockets”.
As well as the income tax move, middle-class voters will also be hit with a new limit of £12,000 on tax-free cash ISAs, an extra 2 per cent landlord tax on rental earnings and national insurance contributions from 2029, with pension contributions made under salary sacrifice plans of more than £2,000 per year.
There was also a manor tax of £2,500 for properties valued at £2 million or more, and £7,500 for properties valued over £5 million.
But he was loudly applauded when he announced the removal of the £3.6bn annual two-child benefit cap, which he had initially resisted but had been called for by Labor MPs and child poverty campaigners, including former prime minister Gordon Brown.
It agreed to hit gambling companies with higher taxes, increasing the remote gaming tax from 21 percent to 40 percent and the online betting tax from 15 percent to 25 percent.
Ms Reeves also abandoned welfare cuts, allowing the bill to rise by £73bn to more than £400bn by 2030 after the humiliation of a U-turn on welfare cut initiatives before the summer.
Electric vehicle drivers will have to pay 3 pence per mile in a new tax that may include the distance traveled abroad, as it will be calculated based on MOT data.
Conservative Party leader Kemi Badenoch said the Budget was a “complete humiliation” for Ms Reeves and called on her to resign.
He claimed the budget was “full of broken promises” and “really should be her last”, adding that Ms Reeves had lost her credibility and trust with the public.
He said: “This is an absolute humiliation. Last year he raised £40 billion in taxes, the biggest tax raid in British history.”
“He promised he wouldn’t come back for more. He swore it was a one-off. He told everyone from now on there would be stability and he would pay for everything with growth.”
“He did not fulfill all of those promises today. If he had any decency, he would have resigned.”
Meanwhile, Reform England leader Nigel Farage predicted that the pension raid could collapse the private pension market.
“This is an attack on desire and an attack on economy,” he said.
In its initial reaction to the budget, the Institute for Fiscal Studies said the chancellor had “found a way to put together a big package without increasing the main rates of national insurance contributions, VAT or income tax”.
But business has warned of its failure to boost economic growth.
Tina McKenzie, head of policy at the Federation of Small Businesses, said: “This tax-increasing Budget shows the danger of a continuing cycle of economic disaster – we shouldn’t be in the same place again next year with further tax rises to balance the books due to a lack of economic growth. A record tax burden is the cost of failing to deliver growth and cutting spending.”
