Chancellor delivers 2025 Budget

Chancellor of the Exchequer, Rachel Reeves, delivered her much anticipated 2025 Budget yesterday (26th November), detailing how she intends to balance the deficit while continuing to invest in public services and drive growth.

While a number of tax increases were anticipated, some ‘big ticket’ tax rises, such as an increase to Income Tax that had been rumoured in the weeks preceeding the Budget, did not materialise. Instead, the Chancellor confirmed a number of smaller changes and a focus on wealth-based income in areas such pay-per-mile taxation of electric vehicles, and taxes on dividends and rental income.

Alongside the Budget, the Office of Budget Responsibility set out the wider forecast for the UK economy. It uprated its growth forecast for this year from 1% growth in March, to 1.5% growth. Average growth over the following three years to 2029, however, is now set to fall from 1.8% to 1.5%. Forecasts for inflation indicated a fall to 2.5% next year, before returning to the Bank of England’s 2% target rate 2027.

In terms of balancing the books and cutting the government’s Budget deficit (the difference between government spending and its income from taxation), the Chancellor anticipates the government will no longer need to borrow money to meet day-to-day spending needs by 2028-2029, reaching a surplus of £24.6 billion in 2030-31.

Key highlights of the measures announced in the Chancellor’s Budget are detailed below:

Employment

Further rises to statutory rates of pay were confirmed, which will take effect from April 2026. The National Living Wage will rise to £12.71 per hour, while the National Minimum Wage (for 18-20 year olds) will increase to £10.85 per hour. The minimum rate of pay for apprentices will increase to £8 per hour.

The thresholds below which no Income Tax or National Insurance is paid have also been frozen for a further three years. Employer NI contributions thresholds have also been frozen.

Workers taking advantage of salary sacrifice schemes that allow pension contributions to avoid National Insurance will also see schemes capped at £2,000 per year by 2029. Income Tax relief will continue to apply.

Tax

The tax paid on dividends and savings income will increase 2% from April 2027, in a shift towards targeting wealth-based income and keep tax rates on earnings from employment the same. The 100% Capital Gains Tax relief for selling a business to an Employee Ownership Trust is also set to be reduced to 50%,

As announced ahead of the Budget, regional mayors in England will also get powers to set local ‘tourist taxes’ on overnight stays in the areas, similar to schemes already in place in Scotland and Wales.

Other tax rises targeting social and health-based causes include an increase to tax of online gambling, up from 21% to 40%, with general betting duty rising from 15% to 25%. Dairy-based drinks, such as pre-made iced coffees and milkshakes, will also lose their exemption from the so-called ‘Sugar Tax’, placing them in the same category as other drinks: the natural sugars found in milk will be excluded from calculations with only added sugars applying to the 4.5g per 100ml threshold.

Tobacco duty will increase by the RPI rate of inflation, plus 2 percentage points, while alcohol duty will be unfrozen, and increase in line with RPI in February.

Property

Similarly to dividend and savings income, income from rental properties will be increased by 2 percentage points from April 2027.

Owners of high value homes over £2 million will also be expected to contribute more through Council Tax, paying an annual surcharge of £2,500 to £7,500 on top of existing bills, in a bid to rebalance disparities in Council Tax around the country. The move will primarily impact homeowners in London, where property prices are higher but many residents pay lower rates of Council Tax than those in similar sized or smaller homes elsewhere in the country.

Hospitality, retail and leisure businesses will see their business rates reduced, affecting 750,000 properties. In return, premises valued at over £500,000 will see a increase in rates.

Companies newly listing on the London Stock Exchange will also benefit from a three year stamp duty holiday, in a bid to encourage more top firms to stay in the UK.

Transport

Fuel duty for petrol and diesel cars will see the 5p temporary cut extended through to September 2026. Electric vehicles and plug-in hybrid vehicles, meanwhile, will face a mileage-based tax of 3p per mile for fully electric vehicles, and 1.5p per mile for hybrids whose owners will also be paying fuel duty: the average driver is expected to pay around £200-300 per year. Ride-share apps, such as Uber will also be required to pay the full 20% rate of VAT.

People with disabilities that require modifications to their cars will no longer be able to access Motability support for luxury car brands, such as Mercedes and BMW. The scheme is also targeted to achieve 50% of vehicles provided being manufactured in the UK.

Regulated rail fares, including for peak-time journeys and season tickets, will be frozen at their current levels next year, the first such freeze since 1996, although below-inflation price rises have occurred in the past. Off peak fares are set by rail operating companies, and may still change.

The Chancellor also continued to voice her commitment to delivering Northern Powerhouse Rail, connecting cities across the North with better East-West rail links. However, additional detail on funding or a timeframe to deliver the scheme was not given.

Education and skills

Regional mayors will be granted a shared £13 billion to invest in skills and business support, as well as infrastructure.

SMEs employing apprentices under 25-years-old will be able to access free training for them. Under 21s who are on Universal Credit and have been NEET (not in employment, education or training) for more than 18 months will also be offered six-month paid work placements in order to continue receiving benefits.

Universities will be required to pay tax of tuition income from foreign students, charged at £925 per student per year.

£10 million has also been commited to ensure all English primary schools have a library by 2029.

Household finances

Alongside the higher tax rate on savings income, changes to ISAs will see the annual allowance for a Cash ISA reduced to £12,000 per year. In a bid to encourage more savers to invest money in UK businesses, they will still be able to get full £20,000 allowance if they put at least £8,000 into a Stocks and Shares ISA.

Supporting household bills, green levies will no longer be raised from energy bills, and instead funded through general taxation. A scheme that provides free insulation for low income households, funded by energy bills, has also been scrapped.

The State Pension will increase in April by 4.8%, in line with wage growth. Universal Credit and child tax credit recipients with three or more children will also no longer face a cap on benefits from April.

NHS prescription charges in England have been frozen at £9.90.