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Chancellor of the Exchequer Rachel Reeves, facing a significant fiscal challenge, delivered a Budget to the House of Commons that commits to a sweeping £26 billion tax raid by 2029-30, primarily through a series of 'stealth' measures that will see the tax burden hit a record 38.3 per cent of GDP. While the Labour government avoided headline-grabbing rises to the core rates of Income Tax, National Insurance, or VAT, the financial weight will be felt sharply by middle-to-higher earners and those with wealth, even as the Chancellor delivered a major boost to low-income households.
The New Taxes: A Broader Net for Revenue
The largest revenue-raiser is the decisive move to prolong the freeze on Income Tax thresholds for another three years beyond 2028. This action, expected to generate £8.3 billion annually, is a mechanism of fiscal drag, ensuring that as wages rise with inflation, hundreds of thousands more people—an estimated 920,000 new higher-rate taxpayers—will be dragged into higher tax brackets over the next decade. The basic, higher, and additional rate thresholds will remain static through to the 2030-31 financial year.
Drivers of Electric Vehicles (EVs) will face a new pay-per-mile tax starting in 2028-29, which will charge 3p per mile, costing the average driver an initial £255 a year. This is designed to offset lost Fuel Duty revenue as the nation transitions to electric. Meanwhile, in a short-term reprieve for all motorists, Fuel Duty will be frozen at the current rate of 52.95 pence per litre for an extra five months, before the 5p temporary cut is unwound in September 2026, leading to inflationary increases from April 2027.
The government also targeted wealth and higher incomes through several structural changes. From April 2029, salary-sacrificed pension contributions above a £2,000 annual limit will no longer be exempt from National Insurance, significantly raising tax for higher earners using this scheme. Property owners face a new 'high value council tax surcharge' from April 2028 on homes valued at £2 million or more, with charges ranging from £2,500 to £7,500 for the most expensive properties. Furthermore, the tax rates on property income, savings income, and dividends are all set to increase by two percentage points from 2027 and 2026 respectively, while the annual tax-free Cash ISA allowance will be slashed from £20,000 to £12,000 from April 2027 for most savers under 65.
Significant Reliefs for Low-Income Families
In the most politically symbolic move of the Budget, Ms Reeves announced the complete abolition of the controversial two-child benefit cap, a measure that has long been linked to rising levels of child poverty. This major welfare commitment, expected to cost £3 billion a year, is projected to lift 450,000 children out of poverty by the end of the decade, providing an average annual increase of £5,310 in benefits for affected families.
Further relief for households struggling with the cost of living was announced through a plan to cut an estimated average of £154 from annual domestic energy bills. This saving will be achieved by moving or removing green levies, specifically by having the Treasury pay 75 per cent of the costs of the Renewables Obligation and by scrapping the Energy Company Obligation (ECO), a scheme that funds insulation. For the lowest-paid workers, the National Living Wage is also set for a significant uplift, alongside an extension of the Winter Fuel Payment scheme, providing crucial support for pensioners and low-income individuals
Overall, the 2025 Budget is a careful balancing act: a broad tax harvest aimed at restoring the public finances, paid for largely by a quieter squeeze on the affluent and the middle class through threshold freezes and wealth taxes, while simultaneously delivering on a major Labour promise to offer a decisive lifeline to the nation's poorest families. The Chancellor made it clear that these were the "fair choices" necessary to steady the economy and tackle the rising cost of living.
