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Rachel Reeves has presented her first budget to the House of Commons, and while many of the announcements had been trailed, there were a couple of surprises in the mix. Here we look at the winners and losers from the chancellor’s statement.
Higher earnersIncome tax thresholds will be unfrozen in 2028 and rise again in line with inflation. Reeves said extending the freeze would have “hurt working people and taken more money out of their payslips”.
The “stealth tax” introduced by the previous government in 2021 has already cost taxpayers thousands of pounds. It pushes more people into higher tax brackets as wages and pensions rise but tax thresholds do not.
Because of the freeze it is expected that 14 per cent of taxpayers (7.8 million) will be paying the higher 40 per cent rate of income tax by the 2027-28 tax year, up from 3.5 per cent (about 1.7 million) in 1991-92.
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The move will also be welcome news to more than 8 million pensioners who already pay income tax, with much of their £12,570 annual tax-free allowance (the amount you can earn before paying any tax), which hasn’t risen since 2021, taken up by the state pension.
Low earnersMore than 3 million low-paid workers will benefit from a 6.7 per cent pay rise from April.
Reeves announced that the national living wage for workers aged over 21 will increase from £11.44 to £12.21 an hour. The rise is nearly four times the latest rate of inflation (1.7 per cent in the year to September).
Younger workers will get an even bigger pay rise. The national minimum wage for those aged 18 to 20 will increase 16.3 per cent from £8.60 to £10 an hour — the largest increase on record.
The new minimum wage for those aged 16 to 17 and those receiving the apprentice rate will rise 18 per cent from £6.40 to £7.55 an hour.
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Carers Carers will now be able to earn more before losing their carer’s allowance, which is worth about £4,259 a year.
At present those who care for one person for at least 35 hours a week and earn less than £151 a week after tax can claim carer’s allowance, which is worth £81.90 a week.
But if you earn even a penny over the weekly earnings cap, you lose the full allowance, and must pay back anything you receive in error. Critics have said the earnings cap is too low and warned it has left carers struggling to repay any overpayments.
Reeves said carers will now be able to earn £10,000 a year, equivalent to 16 hours a week at the new national living wage before losing any allowance. This an extra £45 a week, and it is thought it will allow 60,000 more carers to access the benefit.
She also promised to end the cliff edge at which carers lose their allowance.
PensionersThe triple lock that means the state pension goes up every year in line with the highest of inflation, wages or 2.5 per cent will continue. The state pension will rise 4.1 per cent from April, meaning the full new state pension will go up by £473 a year to £11,976. About 9 million pensioners who retired before 2016 and get the old state pension will see their payments rise from £8,814 to £9,175 in April.
Benefits for those of working age will only rise in line with September’s consumer price index measure of inflation of 1.7 per cent.
DriversFuel duty, a tax levied on petrol, diesel, natural gas and other fuels, will remain frozen. The tax normally rises in line with inflation but has been frozen since 2011. It was cut by 5p in 2022 to help with the cost of living. Fuel duty is 52.95p a litre today and makes the Treasury about £25 billion a year.
Reeves confirmed that she will extend the 5p cut beyond March 2025, when it had been due to come to an end. “In these tough times, with high living costs and global uncertainty, increasing fuel duty next year would be the wrong choice for working people,” she said.
For non-drivers, the government has said the £2 bus fare cap will rise to £3, and be frozen at that level until the end of 2025.
Electric vehicle ownersSome tax breaks on electric vehicles will be maintained. The rate of company car tax for electric vehicles — which is based on the value of a car you get through your employer, your tax bracket and its CO₂ emissions — is to increase from 2 per cent to 9 per cent by 2029-30. It will rise to up to 39 per cent for heavier polluting cars.
Reeves added that the gap in vehicle excise duty (also known as road tax) between electric and regular vehicles would be widened. Owners of electric vehicles registered after April 1, 2025, will pay only £10 in road tax in the first year until 2029-20, but rates for heavier polluting vehicles are due to double in 2025-26.
PubsAlcohol duty on draught beer will be cut 1.7 per cent, giving a “penny off the pints at the pubs”, the chancellor said. However, the duty on non-draught products will increase in line with the retail prices index (RPI) from February.
Shops, cafés and pubs will also benefit from an extension on the business rate relief, which was introduced during the pandemic, to 2026. Reeves said she would create a new, lower rate for firms in the retail, hospitality and leisure sectors, and would ensure that there is not a cliff edge when the discount period ends next year: “I will provide 40 per cent relief on business rates for the retail, hospitality and leisure industry in 2025-26 up to a cap of £110,000 per business.”
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Inheritance taxInheritance tax will be applied to pensions from April 2027 in a huge blow to savers who have left their retirement pots untouched with the intention of passing them on to the next generation.
Until now pensions typically did not form part of your estate for inheritance tax purposes. However, the chancellor said this “loophole would be closed”.
The IFS has forecast that charging inheritance tax on defined contribution pensions — where the size of your pot depends on how much you pay in and how your investments perform — could raise £200 million this year, rising to £400 million by 2029.
The tax-free allowances that mean everyone can pass on £325,000 free of inheritance tax — rising to £500,000 when passing on your main home to a direct descendant — were due to be unfrozen in 2028 but will now stay frozen until 2030.
Investors Investors will pay more tax when selling shares and other assets from April when the rate of capital gains tax (CGT) will increase from 10 per cent to 18 per cent for basic-rate taxpayers and 20 per cent to 24 per cent for higher-rate payers.
The rates of CGT paid on the sale of second homes and buy-to-let properties will remain the same at 18 per cent and 24 per cent. The annual £3,000 CGT-free allowance has been frozen. It had already been cut from £12,300 two years ago.
CGT is levied on the profits made from the sale of property (other than your main home); businesses; shares and most possessions worth £6,000 or more. It is also triggered when an asset is given away.
Business asset disposal relief levies CGT at a lower rate for entrepreneurs and business owners, but this will become less generous. At present they pay 10 per cent on all gains on qualifying business assets, but this will rise to 14 per cent in April 2025 and 18 per cent in April 2026.
Landlords and second-home owners The extra stamp duty on second homes will increase 2 percentage points, with the changes effective from midnight.
Those buying a second property, including a buy-to-let or holiday home, worth more than £40,000 pay additional stamp duty above the standard rate.
Homeowners normally pay stamp duty above £250,000. Those buying a main residence for £300,000 would pay 5 per cent stamp duty (£2,500) above the allowance. But those buying a second home don’t get this allowance. They pay 3 per cent up to £250,000 and 8 per cent above this, making a stamp duty bill of £11,500. From midnight they will pay 5 per cent on up to £250,000 and 10 per cent above £250,000, giving a stamp duty bill of £17,500.
The extra charge on second homes has raised more than £10 billion for HM Revenue & Customs since it was introduced in 2016.
EmployersBusinesses will pay more tax as employers’ national insurance will increase by 1.2 percentage points from 13.8 per cent to 15 per cent from April 2025.
The earnings threshold at which employers start making national insurance contributions will also be reduced from £9,100 to £5,000, which the government forecasts will eventually raise £25 billion a year.
However, the employment allowance — which allows smaller businesses to reduce their national insurance bill — will rise from £5,000 to £10,500. The chancellor said 865,000 employers would not pay any national insurance next year and more than 1 million will pay the same or less than previously. She said a small business would be able to employ four full-time workers on a national living wage without paying any national insurance on their wages.
Private schoolsThe government confirmed that 20 per cent VAT will apply on private school fees from January 2025. The tax will add about £3,100 a year to the cost of private education per child on average, according to the wealth manager Quilter.
Private schools will also not be able to benefit from charitable business rates relief from April 2025. These measures, alongside the government’s plans to tackle tax avoidance, will save about £9 billion over the course of this parliament.
Non-domsThe non-dom regime that allows foreign residents living in the UK to avoid paying tax on their overseas income will be abolished from April. A new “residence-based scheme” will be introduced with “internationally competitive arrangements for those coming to the UK”, Reeves said.
That, along with a transition period to allow foreign income and gains in the next three tax years to be taxed at a lower 12 per cent rate, is expected to raise £12.7 billion over the next five years.
FarmersBusiness relief and agricultural relief — which allowed people to pass on farmland or a majority share of a business free of inheritance tax — has been overhauled to be made much less generous. From 2026, the reliefs will be combined and capped, so that £1 million of business and agricultural assets can be passed on free of tax.
Anything above this will be taxed at an effective rate of 20 per cent. The chancellor said this will protect small family farms, but critics have warned the £1 million threshold does not reflect land values, let alone agricultural buildings and farmhouses.
SmokersSmokers and vapers will pay more with the introduction of a vaping tax and an increase in tobacco duty. A “flat rate duty” on vaping liquid will apply from October 2026.
The commitment to raising tobacco duty by the RPI measure of inflation plus 2 per cent each year will stay in place. In addition, duty on rolling tobacco will rise by 10 per cent this year.
First-time buyersHopes that more help would be announced for first-time buyers were dashed.
There had been widespread calls for changes to the Lifetime Isa to make it easier to buy a first home. Savers can put £4,000 a year into the account and get a 25 per cent government bonus when they use the money to buy a first home worth up to £450,000. This maximum property value has not changed since the accounts were launched in 2017, despite house prices rising significantly.
There was also no mention of an extension to stamp duty relief for first-time buyers. They pay nothing on homes worth up to £425,000, but this will revert to £300,000 from April.