On October 30, UK Chancellor Rachel Reeves announced that the first budget from the Keir Starmer government will raise taxes by £40 billion ($52 billion) to address what she describes as a “black hole” in the nation’s finances, which Labour attributes to 14 years of Conservative governance that left public services severely underfunded.
Reeves, a former Bank of England economist, emphasised that this decision was necessary to restore stability, citing a £22 billion deficit inherited by Labour in July. This shortfall has since grown, impacted by compensation gaps, such as for victims of the infected blood scandal, and chronic underfunding of public services. In her budget address, Reeves stated, “When I assumed the role of Chancellor, I believed the previous Tory government had left a £22 billion gap in the exchequer, but our government has, in fact, inherited a £40 billion deficit.”
She added, “Any Chancellor standing here today would face this reality… and any responsible Chancellor would take action. That is why today, I am restoring stability to our public finances and rebuilding our public services.”
Reeves has made history by delivering her first Budget. After eight centuries of male Chancellors of the Exchequer, the purse strings are now held by a woman.
Key highlights of Reeves' budget
Apart from raising the tax by £40bn, the Chancellor made the following key announcements as listed below:
TAXES
Starting April 2025, National Insurance contributions for employers will rise by 1.2 percentage points to 15%, and the threshold for contributions will drop from £9,100 to £5,000 annually, generating £25 billion per year.
Capital Gains Tax (CGT) on asset sales will increase, with the lower rate moving from 10% to 18% and the higher rate from 18% to 24%. CGT on residential property sales will also increase to 24%.
Tax thresholds will now rise annually with inflation starting in 2028, ending the freeze on income tax bands that had been in place.
The inheritance tax freeze will be extended by two years to 2030, allowing the first £325,000 to be inherited tax-free, increasing to £500,000 for direct descendants, and up to £1 million for a surviving spouse or civil partner.
Effective immediately, the stamp duty surcharge on second homes, or the 'higher rate for additional dwellings,' will increase by two percentage points to 5%.
BENEFITS
Health and employment services for disabled individuals and those with long-term illnesses will receive a funding boost of £240 million.
The minimum wage for people aged 21 and over will increase by 6.7% to £12.21 per hour, adding up to an additional £1,400 annually for full-time workers. Workers aged 18 to 20 will see a 16.3% rise, bringing their minimum wage to £10 per hour.
The earnings threshold for Carer's Allowance will rise, allowing people to earn £10,000 or more and still qualify, benefiting new recipients with an extra £81.90.
An additional £1 billion will go to the Household Support Fund, providing essential assistance to those facing financial hardship.
BUSINESS
The Employment Allowance for businesses will double from £5,000 to £10,500, enabling 65,000 employers to pay no National Insurance at all next year. This change means over a million businesses will pay the same or even less in National Insurance than before.
Business rates relief for retail, leisure, and hospitality sectors will decrease from the current 75% to 45%.
SCHOOL AND EDUCATION
VAT on private school fees will begin in January 2025, and business rates relief for private schools will end in April 2025.
Around 500 outdated state schools will be rebuilt with a £1.4 billion investment, alongside an additional £300 million annually for school maintenance, including addressing RAC issues.
Funding for free school breakfast clubs will be tripled to £30 million in 2025 and 2026, while core school budgets will see a £2.3 billion increase next year.
Further education will receive a £300 million boost, with an additional £1 billion allocated for children with special educational needs (SEN).
NHS AND HEALTH
The NHS's daily budget will rise by £22 billion.
This increase will enable an additional 40,000 hospital appointments and procedures weekly, along with £1.5 billion allocated for new hospital beds.
ECONOMY
The government projects public finances will reach surplus by 2027-2028, achieving stability two years ahead of schedule.
According to the Office for Budget Responsibility (OBR), UK GDP growth is forecast at 1.1% in 2024, 2.0% in 2025, 1.85% in 2026, 1.5% in both 2027 and 2028, and 1.6% in 2029.
OBR estimates for public sector net borrowing are £105.6 billion in 2025-26, dropping to £88.5 billion in 2026-27, £72.2 billion in 2027-28, £71.9 billion in 2028-29, and £70.6 billion by 2029-30.
OTHER HIGHLIGHTS
Local governments will receive at least £600 million in funding for social care.
A £5 billion investment in housing will boost the affordable homes program to £3.1 billion.
An additional £1 billion will be allocated for removing hazardous cladding, in line with the Grenfell inquiry recommendations.
Fuel duty will remain frozen this year and next, continuing the existing 5p reduction.
Draft alcohol duty will be reduced by 1.7%, potentially lowering drink prices by 1p.
Tobacco taxes will increase by inflation plus an additional 2%, with a 10% rise on rolling tobacco.
Starting next October, a flat-rate duty will be applied to all vaping liquids.
The HS2 rail link between Old Oak Common in west London and Birmingham has been confirmed, with tunnelling work extending the line to London Euston.
Air passenger duty on private jets will increase by 50%, amounting to £450 per passenger.
The annual defence budget will dip below 2.5% of GDP next year, with an added £2.9 billion for the Ministry of Defence.
The government commits to providing £3 billion annually to Ukraine for "as long as it takes."
The soft drinks levy will rise annually with inflation, generating nearly £1 billion a year.
Government departments will face a 2% target for productivity, efficiency, and savings next year, aiming to "use technology more effectively and integrate services across government."
Reeves assured that there would be no tax hikes for working individuals, a promise she first made following Labour’s election victory in July. To meet funding needs, £25 billion will come from increasing employers’ National Insurance contributions, while adjustments to inheritance taxes will yield an additional £2 billion. Further revenue will be generated from changes to capital gains and property taxes.