Taxes will increase by £40bn – and the lion’s share will come from a £25bn rise in employers’ national insurance contributions, the chancellor announced in the budget.
Rachel Reeves said the amount businesses will pay on their employees’ national insurance contributions will increase from 13.8% to 15% from April 2025.
She also lowered the current £9,100 threshold employers start paying national insurance on employees’ earnings to £5,000, in what she called a “difficult choice” to make.
The Office for Budget Responsibility (OBR), which monitors the government’s spending plans and performance, said most of the burden from the increase will be passed on to workers through lower wages, and consumers through higher prices.
It estimated the national insurance hike would reduce the average time worked by the equivalent of 50,000 hours.
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The £40bn rise in taxes is the largest increase at a budget since John Major’s government in 1993 and is set to more than fill the £22bn “black hole” Labour said the Conservative government left them with.
Ms Reeves also announced the current freeze on income tax thresholds will end in 2028/29 and will be uprated in line with inflation after that.
The previous Conservative government froze the thresholds, which meant more people paying higher rates of tax as their salary increases and they move into higher tax bands.
The OBR said, as a result of the budget, the tax burden will reach “a historic high of 38% of GDP by 2029/30” and predicted inflation and interest rates will both be higher.
The chancellor said a “line-by-line breakdown” of the black hole will be published, which she said shows there were “hundreds of unfunded pressures on the public finances” under the Conservatives.
Ms Reeves, who said she was “deeply proud” to be the country’s first female chancellor, insisted the Labour government would “invest, invest, invest” and put “more pounds in people’s pockets”.
Some of the other major changes the chancellor announced include:
• Fuel duty will stay frozen next year and the 5p per litre cut to remain
• Capital gains tax lower rate will increase from 10% to 18%, higher rate from 20% to 24%
• Residential property capital gains tax will remain at 18% and 24%
• Two “permanently lower” business tax rates for retail, hospitality and leisure properties
• 40% relief on business rates in 2025-26 with a £110,000 cap
• Inheritance tax thresholds frozen until 2030
• Inheritance tax to apply to unspent pensions pots
• Agricultural property relief and business property relief will not be allowed “on wealthiest estates”
• Higher rate stamp duty for second homes increased to 5% from Thursday
• Alcohol duty rates on non-draught drinks to increase in line with RPI from February
• Draught alcohol duty cut by 1.7% – 1p off a pint
• HS2 will go to Euston in central London
• Every government department must make 2% cuts by next year
• £22.6bn extra for the NHS’ day-to-day health budget, £3.1bn more for the capital budget
• £2.3bn for schools to hire teachers next year, £6.7bn for the schools capital budget
• £5bn investment for housing, including £3.1bn more to Affordable Homes Programme
• £2.9bn more for Armed Forces next year
• £500m increase in road budgets next year for pothole repairs
• Weekly earnings limit for carer’s allowance raised to equivalent of 16 hours at national living wage per week
• Extra £3.4bn for the Scottish government, £1.7bn for the Welsh government and £1.5bn for Northern Ireland.
Read more:
The key budget announcements
Minimum wage to go up by nearly 7%
Rachel Reeves and her Treasury team before the budget. Pic: Reuters
The chancellor started her budget speech by saying the country “voted for change” and “responsible leadership” on 4 July at the general election – and went on to attack the “irresponsibility” of the previous Conservative government.
“We must restore economic stability and turn the page on the last 14 years,” she said.
Ms Reeves added: “The party opposite failed our country. Their austerity broke our National Health Service. The British people have inherited their failure.”
“They called an election to avoid making difficult choices,” she continued.
The chancellor outlined her priorities as economic growth and the NHS, and pledged an end to “short-termism”.
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Labour promised to keep the triple lock on pensions, where the state pension goes up each year by whichever is higher of 2%, inflation or earnings growth.
She said that means it will be uprated by 4.1% next year so more than 12 million pensioners will be up to £470 better off.
She also set aside £11.8bn for compensation for victims of the infected blood scandal, and £1.8bn for victims of the Post Office IT scandal.
Ahead of the first Labour budget since Alistair Darling’s in 2010, Labour committed in its election manifesto to not increase income tax, national insurance or VAT on “working people”, which Ms Reeves said she had kept to.
Various ministers got into a tangle over who exactly qualified as a working person in the weeks before the budget.
Pic: Reuters
A few plans were leaked or announced ahead of the budget, including:
• All private school fees will include VAT from January, business tax relief to be removed from private schools in April
• Windfall tax on oil and gas profits to increase to 38%
• An increase on employers’ national insurance – but they did not say by how much before the budget
• Non-dom tax regime abolished
• A change to the fiscal rules – the way in which the government borrows and pays back money – in order to allow for greater investment spending
• An increase to the bus fare cap by 50% to £3
• A boost to the national living wage, with the minimum someone aged 21 and over can be paid increasing by 6.7% to £12.21 an hour
• The national minimum wage, for 16 to 20-year-olds, will also increase – by 16.3% to £10 an hour.