Labour Unveils 2025 Budget with Tax Rises and Major Economic Reforms

Labour’s 2025 Budget introduces a series of significant tax increases and economic reforms aimed at balancing the public finances, with workers and pensioners prominently affected. The Office for Budget Responsibility prematurely released the main proposals, prompting a swift response from the chancellor and the Treasury.

At the centre of the plan sits a freeze on income tax thresholds for an additional three years, extending until 2030 to 2031. This measure is expected to push a greater proportion of earners into higher tax brackets as salaries rise. Alongside this, the national living wage will increase by 4.1 percent to £12.71 per hour, while the national minimum wage for those aged 18 to 20 will rise by 8.5 percent to £10.85 per hour.

Pension contributions made through salary sacrifice schemes above £2,000 per year will lose their exemption from national insurance contributions from April 2029. This change is forecasted to generate £4.7 billion in revenue for the 2029 to 2030 financial year.

An annual levy, described informally as a mansion tax, will be introduced on residential properties valued above £2 million, commencing in April 2028. Projections suggest this will raise £400 million for the government in the 2029 to 2030 period. Transfers of property valued up to £1 million between spouses or civil partners will become exempt from inheritance tax starting next April.

The widely debated two child benefit cap will be abolished from 2026, with estimates placing the cost at £2.3 billion for 2026 to 2027, rising to £3 billion by 2029 to 2030. In a move designed to offer some relief to consumers, green levies will be removed from household energy bills from next year until 2029, anticipated to cut the average bill by £150 from April. However, the accompanying fuel poverty programme for energy efficiency will be scrapped.

The annual limit for tax free cash ISA savings will be reduced from £20,000 to £12,000 from April 2027, with those over 65 retaining the higher threshold. Dividend, property, and savings income tax rates will rise by two percentage points, raising an estimated £2.1 billion by 2029 to 2030. Business rates will drop for 750,000 retail and leisure properties, balanced by increased rates on higher value commercial properties.

Fuel duty will remain frozen for a further five months, with the post Ukraine invasion 5p cut to be gradually phased out. From 2028, drivers of fully electric vehicles will be subject to a new road tax charge of 3p per mile, equating to £255 annually for those averaging 8,500 miles. Rail fares will remain frozen for one year, promising commuters savings of up to £300 on the most expensive routes.

Alcohol duty will increase in line with inflation from February, and all vaping liquid will carry a flat excise duty of £2.20 per 10ml from October next year. Remote gambling duties will climb to 40 percent for online casinos from 2026, with a new general betting duty at 25 percent for all online sports wagers, while in-person gambling and bingo duty remain unchanged or reduced.

Regional investment is addressed with an additional £13 billion to be distributed among seven city mayors for skills, business, and infrastructure initiatives, complemented by direct funding boosts for devolved administrations. The UK economy is set to grow by 1.5 percent this year, though future growth has been revised downwards, with GDP predicted to rise by 1.4 percent next year.