UK Budget unveiled: Rachel Reeves evades austerity measures by bringing taxes to record levels 

UK Chancellor Rachel Reeves set out £26 billion in tax rising tweaks as she attempts to balance self-imposed fiscal rules without a return to austerity. 

A continued freeze on tax thresholds accompanies a small goody bag to aid with the cost-of-living, the headline policy of which is the removal of the two-child benefit cap. 

A controversial Budget 

The Budget was marred in controversy even before Reeves began her speech; the Office for Budget Responsibility (OBR), the UK’s fiscal regulator, accidentally released the entire document 20 minutes ahead of schedule. 

The unprecedented slip-up gave opposition leader Kemi Badenoch more time to ingest its details. 

She went on to call it “a Budget for Benefits Street, paid for by working people”, lambasting Reeves’ ‘tax big, spend big’ approach.  

In recent days, she has also accused Reeves of overplaying the fiscal challenges as reasoning for tax rises, noting that the OBR projected Reeves would just about meet her own fiscal rules regardless. 

The government has rejected this accusation.  

Lib Dem leader Ed Davey described the move to abolish the two-child cap as “excellent”, noting that this was in the Lib Dem manifesto.   

He did, however, liken Reeves to “a doctor who has diagnosed the disease but is refusing to administer the cure”, in reference to the negative effects of Brexit and leaving the common market.   

“All of the incentives are bad”, said Reform leader Richard Tice, calling it a “hokey-cokey” Budget.   

Tax threshold deep-dive 

Previously set to rise with inflation after 2028, Reeves has this time kept tax bands frozen for another three years.  

This means that, as wages rise, more people will be dragged into higher bands of tax, thereby paying more money. 

This is known as a ‘stealth tax’, as it is hard to directly see its effects on your pay packet.  

In addition, the threshold above which older graduates begin paying back their student loans has been frozen at £28,470, and universities will also see a levy of £950 charged per international student.  

The statutory minimum wage is also set to rise by 50p to £12.71 per hour for workers aged 21 and over, and £10.85 for those between 18 and 20.  

Whilst welcomed by low-pay groups, there are fears that the move could exacerbate a brewing youth inactivity and unemployment crisis, especially as the minimum wage creeps up to the student loan repayment threshold.  

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ISA + pension caps 

The annual limit under 65s can put into cash ISAs will decrease to £12,000.  

Stocks and shares ISAs will still retain the full £20,000 limit. 

This means you can put £12,000 into a cash ISA and another £8,000 into a S&S ISA each year. 

The Treasury has said the move is in aid of encouraging young people to invest, rather than save their money. 

Reeves is also introducing an annual tax-free cap of £2,000 on salary sacrifice pension contributions. 

Once you have put £2,000 into a pension scheme via salary sacrifice, you will need to pay national insurance on top of any further contributions.  

This is to discourage higher earners from artificially lowering their salaries below tax thresholds, though there is criticism that the relatively low cap will discourage many from contributing to their pension at a time when very few are saving enough for their retirement.  

Cost-of-living goody bag 

Reeves also announced several measures designed to ease the cost-of-living.  

The most anticipated – and costliest – of which is abolishing the two-child benefit cap, unlocking up to £5,450 for a low-income family. 

The announcement brought the loudest applause from Labour MPs, some of whom had long criticised Reeves for not removing the cap in her Budget last year.  

Energy efficiency schemes will be funded by general taxation rather than bill levies, knocking off £150 a year on energy bills on average.  

Most train fares, in anticipation of the newly nationalised service Great British Railways, will be frozen. 

Prescription charges will also remain at £9.90 in England.  They are free elsewhere in the UK.  

Further tweaks 

There will be a council tax surcharge of £2,500 and £7,500 for houses worth over £2 million and £5 million respectively. 

The sugar tax will be expanded to high-sugar dairy products such as milkshakes and canned lattes.  

Gambling taxes are rising, with exemptions for horseracing and a complete removal for bingo.  

A 3p-per-mile charge on EVs from 2028, though the details of how this will be calculated are not yet known. 

The training of apprentices under 25 will be free for small and medium-size businesses. 

It is many of these tweaks and more which has led to this Budget being described as a “smorgasbord” of changes.  

Whether the complex lighter touch of tweaks, as opposed to an easier outright tax percentage hike, will be enough to appease voters and MPs, businesses and workers, the markets and the OBR alike, is only to be observed in the coming weeks and months. 

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