Rachel Reeves targets UK’s wealthiest in £26bn tax-raising budget | Budget 2025

Rachel Reeves has targeted Britain’s richest households with a £26 billion tax increase budget to scrap two child benefit policies and raise funds to cut energy bills.

On a chaotic day that saw key details of his budget mistakenly released prematurely by the Office for Budget Responsibility (OBR), the chancellor defended the measures by saying he “asked everyone to contribute to repairing the public finances” but wanted the richest to pay the most.

The budget, which insists it avoids reckless borrowing and dangerous cuts, will boost tax revenues to an all-time high of 38% of GDP within five years.

More than 1.7 million workers will either be dragged into paying tax for the first time or pushed into a higher band with an additional three-year freeze on income tax and national insurance thresholds. Reeves acknowledged it would impact “working people” but would bring in £12.4bn by 2030-31.

Some Labor MPs have privately expressed concern that the budget will hit the so-called “squeezed middle”, including more nurses, teachers and police officers paying higher rates of tax.

Almost one in four taxpayers, or 24%, will pay higher or additional rates within five years as a result of the extension of the threshold freeze, known as “fiscal drift”. The OBR said freezing the threshold would enable an additional 780,000 people to pay the basic rate of income tax; 920,000 by paying the higher rate; and another 4,000 people will pay the surcharge.

In a series of well-tracked measures, the Chancellor has targeted the wealthy through a new council tax surcharge on properties worth more than £2 million and announced a 2p tax increase on dividends, savings and income from properties. Contributions to “salary sacrifice” pension schemes, where employers pay no national insurance, will be capped at £2,000 from 2029, generating a significant £4.7bn a year.

Reeves later told reporters he did not believe he had breached the Labor Party manifesto by freezing the threshold. “If you read the manifesto, we are very clear, we say ‘income tax, NI and VAT rates’, but if you ask whether there is a cost to employees, I accept that there is,” he said.

The OBR said the tax squeeze will hit living standards and real disposable household income is projected to rise by just 0.25% a year over the forecast period, weaker than expected in March.

Financial markets reacted positively as Reeves more than doubled the fiscal buffer he had left in breach of his fiscal rules to £21.7bn from less than £10bn in his spring announcement.

The 10-year government bond yield, which moves inversely to prices, fell 0.07 point to 4.41% late Wednesday, lowering the cost of government borrowing.

Labor MPs welcomed the chancellor’s decision to spend £3bn a year on the full removal of the controversial two-child benefit cap; the government said the move would lift 450,000 children out of poverty.

“I do not intend to preside over a status quo that punishes children for the circumstances in which they are born,” the chancellor said, to cheers from the Labor backbenches.

Reeves also promised to reduce inflation with a package of cost-of-living measures, including removing green subsidies from household energy bills and freezing rail fares.

Taxes on energy bills will now be paid from general taxation; The Treasury said the move could reduce bills by an average of £150 a year from next April.

Labor MPs and ministers praised the budget as a shift to the left and said it bought Keir Starmer and Reeves time from the much-talked-about leadership battle.

“This shows that we are a full-blooded Labor government; in an ideal world we would want prosperity to come first, but that’s where we are now. People want us to have an argument, and this is one of them. The rich pay more and we protect those who need it most,” said a senior strategist.

But many others said the OBR showed continued fundamental weakness in the economy and deep reservations about Starmer’s leadership would not be addressed by this budget. “This does nothing to change the fundamentals,” one minister said. “Once again an opportunity for courage presented itself and it didn’t lead to much of anything.”

Another minister said: “This buys them a few months on the backbenches and in the bond markets and further strengthens the hatred of my constituents. But it delays the now inevitable showdown.”

Reeves also announced that the OBR would only assess him against his financial rules once a year, in the autumn budget; This change aims to prevent the re-emergence of instability. responded to the OBR’s weak economic forecasts; The OBR now forecasts average GDP growth over the next five years to be 1.5% (0.3% slower than previously expected).

Other revenue raisers Reeves announced include freezing the threshold and manor tax, as well as a £1.1bn increase in online gambling duty and a 3p per mile levy on electric vehicles. Rishi Sunak’s 5p cut in fuel duty has been extended until next summer, but will start increasing from next September.

Gold yields began to fall before Reeves stood up in the House of Commons as investors digested the OBR’s budget document, which was mistakenly published on the watchdog’s website 40 minutes before Reeves was due to speak.

Jonas Goltermann, deputy chief markets economist at Capital Economics, said: “The gilt market is breathing a sigh of relief as today’s eagerly awaited UK budget announcement delivers less bad news than feared and the chancellor appears to have emerged slightly stronger so far from a troubled fiscal period.”

However, some analysts noted the heavy-handed nature of Reeves’ plans; Borrowing will be higher over the next three years and most of the tax increases will be planned at the end of parliament to ensure it can meet its fiscal rule of covering daily expenses with taxes.

“To reduce borrowing in subsequent years and deliver this increase in ‘headroom’, the chancellor is relying heavily on tax increases towards the back end of parliament,” said Helen Miller, director of the Institute for Fiscal Studies (IFS). “More borrowing for the next few years, then a sharp adjustment. Spend now, pay later.”

“It’s one thing to promise to reduce debt, it’s another to actually deliver on it,” he added.

Ruth Curtice, director of the Resolution Foundation, welcomed the steps to reduce the cost of living; but reiterated the IFS’s warning. “This budget leaves much of the financial repair work to 2028 and beyond. Economic headwinds can change dramatically between now and then. The Chancellor has taken a sensible step to increase his leeway at the start of parliament, but the effects will be felt at the end,” he said.

Reeves addressed MPs in parliament on Wednesday night, warning them they would face a negative reaction on the newspaper’s front pages, but said it was up to them to sell the budget to voters.

“We have to win the debate now, and we have to win it every day. We have to win the budget debate. We have to campaign on the budget, and that’s what we have to do now,” he said.

Conservative leader Kemi Badenoch dismissed Reeves’ statement as a “Benefits Street budget” and accused him of “making ordinary people pay for his incompetence and inability to confront Labour’s tax-hungry left-wing supporters”.

Soft left MPs said it was a victory for time-wasters who had pushed the party left since the welfare revolt. The resurgent group of Tribune MPs, who are likely to be instrumental in any future leadership challenge for a left-wing candidate, praised the chancellor and described it as a “Labour budget, demonstrating Labor values”.

But in a warning shot, it said the budget “should be the start of a broader modernization programme”. Future tax reforms should aim for simplicity, sustainability and fairness; “It should ensure that hard work is rewarded, unearned income and wealth are taxed more consistently, and that those with the broadest shoulders continue to contribute proportionately to national renewal.”