UK chancellor Rachel Reeves has announced a £40bn tax increase, the biggest in a generation, with business bearing the brunt of a Budget she said would fix Britain’s “broken” public finances and public services.
The massive tax rise, which will fund a big increase in spending on the NHS and schools, will take Britain’s tax burden to a record high. It was accompanied by a planned £100bn rise in capital spending — funded by extra borrowing — over the parliament.
“These choices aren’t easy but they’re responsible,” Reeves told the House of Commons, to ecstatic cheering from Labour MPs. Conservative leader Rishi Sunak said she had “broken promise after promise”.
Most of the tax increase will come from a £25bn rise in national insurance paid by employers, which will go up by 1.2 percentage points to 15 per cent from April. The level at which employers start paying NI for workers will drop from £9,100 to £5,000.
Business groups have warned that increasing NI for employers may force some companies to dismiss staff or close at a time when wages and other labour costs are also increasing.
Around £9bn a year will be raised from higher taxes on groups including people who benefit from the “non-dom” scheme for wealthy foreigners’ overseas income, as well as private schools, energy companies and private equity chiefs.
Reeves announced an immediate increase in capital gains tax, with the lower rate rising from 10 per cent to 18 per cent, and the higher rate from 20 per cent to 24 per cent. She also said increases in inheritance tax — notably applying it to pensions — would yield £2bn a year.
The chancellor confirmed that the UK’s national living wage would rise by 6.7 per cent to £12.21 from next April, with a bigger increase for the youngest workers.
The decision to increase tax, spending and borrowing is a major gamble for Reeves, the first woman to hold the position of chancellor in the 800-year history of the post.
In total her Budget increased taxes by £41.1bn a year by the end of the forecast period in 2029/30 with spending — including capital investment — increasing by £74.1bn in the same year, leaving Reeves with a funding gap of £32.9bn.
The independent Office for Budget Responsibility said the total effects of Reeves’ Budget decisions would be to “push up CPI inflation by around half a percentage point at their peak”.
The tax rise, one of the biggest ever seen in a Budget as a share of national income, outstripped the increases of Reeves’ predecessors Rishi Sunak in 2022, George Osborne in 2010 and Gordon Brown in 2002.
Tax as a share of GDP was forecast by the OBR to rise from 36.4 per cent this year to a historic high of 38.2 per cent in 2029/30.
Her Budget on Wednesday — the first for a Labour government in 14 years — is likely to shape the country’s politics and economics for the rest of this parliament.
The chancellor said the Budget would stabilise the public finances, patch up crumbling public services such as the NHS and pave the way for higher growth.
She announced a £6.7bn increase in capital investment in education, a 19 per cent increase in real terms on this year.
Reeves also promised a £22.6bn increase in the “day to day” health budget over two years, and a £3.1bn increase in the NHS capital budget, in what she described as the largest real terms increase since 2010, outside of the Covid-19 pandemic.
But she said that she would not prolong a freeze on thresholds for personal income tax and national insurance beyond the 2028 date planned by the last government.
The UK government bond market was broadly encouraged by Reeves’ remarks, with borrowing costs falling while she spoke. Ten-year yields later reversed course, trading at 4.25 per cent — roughly where they were before the Budget but below the previous day’s four-month high of 4.32 per cent. Yields move inversely to prices.
The pound gained slightly, trading at $1.301 against the US dollar compared with $1.295 before the chancellor spoke.
The benchmark FTSE 100 was trading down 0.4 per cent, while the more domestically focused mid-cap FTSE 250 gained 1.3 per cent, boosted by a rally in housebuilder shares.
The chancellor maintained the UK’s long-standing freeze on fuel duty, but increased taxes on corporate jet use.
She confirmed the UK would introduce a new “internationally competitive” residence programme instead of Britain’s “non-dom” scheme and said Labour would increase the capital gains rates on carried interest to 32 per cent from April, up from 28 per cent.
Pledging that the UK would not return to austerity, she said departmental day-to-day spending would grow by 1.5 per cent in real terms from next year, compared with the previously planned 1 per cent, in what remains a tight expenditure settlement.
Capital spending expenditure will grow by 1.7 per cent in real terms.
In a combative Budget speech, Reeves said the previous Conservative government “hid the reality of their public spending plans” from the electorate and the OBR, the independent forecaster.
“Never again will we allow a government to play fast and loose with the public finances,” she told parliament. But Sunak said the OBR made no mention of the £22bn “black hole” that Reeves claimed to have discovered.
Reeves confirmed that the government’s new investment rule would define debt as “public sector net financial liabilities”, in a move that will increase scope for borrowing. She added that under the government’s new rules, net financial debt will fall in the third year of every forecast.
The OBR predicted the chancellor’s Budget would put her on track to meet her revised debt rule two years ahead of schedule, leaving her with £15.7bn room for manoeuvre.
Her decision to loosen her fiscal rules to allow more capital investment in hospitals, schools, green energy projects and transport was trailed in advance, in an attempt to manage market expectations.
In forecasts accompanying the Budget, the OBR forecast that real UK GDP growth will be 1.1 per cent this year, 2 per cent in 2025, 1.8 per cent in 2026 and at 1.5 per cent to 1.6 per cent for the rest of the decade.