The Labour government, led by Chancellor Rachel Reeves, presented its first budget yesterday, introducing significant tax measures aimed at closing a £40 billion deficit. Key policies focus on wealthier individuals, businesses and select public services.
The new budget increases capital gains tax, targets high-value inheritances and removes several tax reliefs benefiting non-domiciled residents and certain landowners. These measures are projected to generate £25 billion by 2029. She also confirmed an increase in employers’ national insurance contributions, projected to impact hiring and business costs. The government plans to channel these funds into public services, especially health and education, with a commitment of £100 billion in capital spending over five years.
On the personal tax side, inheritance and capital gains tax changes mean that high earners and the wealthy will see increased liabilities. For instance, inheritance tax will now apply to certain pension assets and high-value estates. Council tax rates may also rise by 5% annually in some areas, adding further pressure on residents, particularly in higher-cost regions such as London. Stamp duty on second properties is also set to increase, although the government will maintain the fuel duty freeze in response to the ongoing cost-of-living crisis.
In addition to fiscal tightening, she introduced new economic goals, aiming to balance the budget by 2029 while driving growth through increased capital investment. However, economists caution that these measures could unsettle markets and challenge business growth if not carefully managed.
Key measures
Rise in minimum wage
The budget includes a much-anticipated increase in the minimum wage, which aims to improve living standards for lower-income earners. This aligns with Labour’s focus on reducing income inequality and supporting households amid rising living costs.
Starting in April 2025, the minimum wage for those aged 21 and over, known as the National Living Wage, will see a 6.7% increase, moving from £11.44 to £12.21 per hour. For a full-time worker (37.5 hours weekly), this adjustment will bring their annual earnings up to £23,873.60, compared to the previous £22,368.06.
For workers aged 18 to 20, the minimum wage will increase from £8.60 to £10 per hour. This translates to an annual income of £19,552 for a 37.5-hour workweek, an improvement from £16,815. However, only a small portion of individuals in this age range typically work full-time.
Apprentices will see the most substantial raise, with their hourly wage rising from £6.40 to £7.55. This increase brings their annual full-time pay to £14,762, up from the current £12,513.
Investments in public services
Significant funding will be directed toward healthcare and education, with £100 billion pledged for capital projects. This increased spending on hospitals, schools and infrastructure is expected to enhance service quality and support growth.
Greater fiscal equality
The budget introduces new taxes on high earners, such as increased capital gains tax rates and adjustments to inheritance taxes. This aims to generate additional revenue from the wealthiest, reducing the tax burden on the broader public while funding essential services.
Commitment to climate goals
The government’s decision to maintain the fuel duty freeze helps balance the cost of living and environmental priorities. It signals Labour’s commitment to a green transition, even amidst global economic challenges.
Long-term economic planning
By setting goals for fiscal stability with a target to balance the budget by 2029, Labour intends to foster stability and reduce national debt in the long term. This could stabilise markets and provide greater economic certainty over time.
Higher costs for businesses
The rise in employer national insurance contributions, intended to raise funds for public services, may also increase costs for businesses, potentially discouraging hiring and stalling economic growth. Small and medium-sized enterprises are expected to be most affected, as they may struggle to absorb these new costs.
Inherited pension tax
For the first time, inherited pensions will be subject to inheritance tax. This change, effective in 2027, has raised concerns, especially among families who rely on inherited pensions for financial security. Critics argue this policy could reduce generational wealth transfer and add tax burdens on families who inherit retirement savings.
Limited benefits for middle and low-income earners
Although the budget focuses on public service investment and taxes on wealthier groups, middle and low-income earners may still feel pressure from rising council tax rates and stagnant personal tax thresholds until 2029.
Housing market impacts
Stamp duty increases on second homes may slow down the housing market, particularly in areas with high property prices. This could also affect renters, as landlords might pass increased tax costs onto tenants.
Market concerns
The extensive borrowing required to fund these initiatives has caused unease among investors, pushing up borrowing costs. This raises concerns that the planned investments may strain the budget further if economic conditions worsen.
Overall, Labour’s budget seeks to balance social investment and fiscal discipline, with bold moves to fund public services and tackle inequality. Yet, increased business costs, inheritance tax on pensions and market reactions reveal potential economic risks. How these policies affect long-term growth and equality will be crucial to their success.
