Labour’s second budget began early last summer with a series of economy-damaging kite-flying proposals and leaks. They caused concern everywhere and led to the halting of investment and the stalling of the housing sector. So the real surprise of the budget wasn’t so much the content but that the whole thing was published before the chancellor rose to announce it.
This was a tax-and-spend budget, with the highest tax rises since 1970, according to the Institute of Fiscal Studies.
The big problem for the government was that its election manifesto sought to be populist by promising not to increase VAT, national insurance or income tax; it had effectively boxed itself into a corner. So rather than putting, say, tuppence on every rate of income tax, it was left to tinker at the edges of the tax system.
And despite promising to help ‘working people’, the reality is that they will be paying more; tax bands, for example, have been kept static until 2031, dragging those with pay rises into basic or higher rates.
EV sales are expected to drop as drivers of these vehicles will soon be paying 3p per mile to drive. It’ll be interesting to see how this is administered and if, as has been suggested, the annual bill will include miles driven overseas.
Those with homes worth £2m or more will be charged a new form of council tax. To be fair, it did seem iniquitous that large and stately homes were only one band beyond the average home in, say, the home counties.
Employers and employees will be unhappy that pension salary sacrifice will be curtailed through a £2000pa limit. While it seemed a little unfair that the wealthiest received the most favourable tax treatment on their contributions, justifying giving everyone a flat rate relief, this limit will do nothing to encourage employees to make provision for their old age.
Employers will also have to contend with an increase in the national minimum wage.
But SMEs will have apprenticeships for eligible under-25s paid for. And those in retail may be thankful that there will be customs duty on all low-value imports (below £135) – they won’t be undercut by the likes of Temu any more. They may be further buoyed with a permanent 5p cut to business rate multipliers for retail, hospitality, and leisure businesses. This will be paid for by a 2.8p increase on high-value business premises.
However, business owners who extract profit by dividends will, on the lower two rates, pay an extra 2%.
Hidden in the budget document are other changes – e-invoicing will be mandated from 2029 for business-to-business sales; there’s a soft landing to Making Tax Digital self-assessment penalties for a year and a consultation on timely payments for self-assessment; and rather than increase the rates of capital gains tax, there’s the tightening up of conditions for reliefs on the disposal of shares and incorporating businesses.
Of course, there’s much more detail in the official 150-page budget document (see gov.uk – Budget 2025 document).
How has the budget been seen in the real world? The Institute of Fiscal Studies reckons that households face a “truly dismal” rise in spending power for five years; that’s not going to do much for retail and allied sectors.
Notably, left-leaning Guardian isn’t impressed; it ran the headline “‘Struggling to pay the bills’: Britons under pressure react to budget 2025” along with an op-ed “Rachel Reeves’s budget has inflamed, not calmed, Britain’s febrile mood.”
The Confederation of British Industry (CBI) commented that “the government’s growth mission is currently stalled”, but added that the government “should be commended for protecting capital spending, boosting innovation, sticking with the corporate tax roadmap…”
The markets weren’t unhappy; the pound strengthened slightly to $1.32, and the FTSE rose.
Ultimately, as with any budget, how it’s received is dependent on a reader’s viewpoint. But one thing is certain, Labour has not improved its election prospects by increasing taxes in 2024 and now coming back for more after promising not to.