What the Budget means for your money

The Labour government came into power pledging to protect “working people” from tax rises.

In her party’s first Budget in 14 years, chancellor Rachel Reeves confirmed that employers would shoulder the burden of tax rises to plug a £22bn black hole in the nation’s finances, “inherited” from the previous government.

In total, £40bn of tax rises were announced in the Budget, to cover not only the fiscal black hole but also to pay for two compensation schemes for victims of the infected blood and Post Office IT scandals.

While the chancellor did not announce any immediate changes to the key taxes hitting workers’ pay packets, other measures announced in Wednesday’s Budget will see millions of individuals paying more tax in future years.

Here’s our summary of the key measures in the Budget and how they will affect your personal finances.

Tax

In the largest tax-raising Budget in living memory, Reeves announced big tax increases for employers and wealthier people.

The key measure was a 1.2 percentage point increase in employer’s national insurance to 15 per cent. The threshold at which employers start paying the tax was also reduced from £9,100 to £5,000. The changes will come into effect from April next year and are expected to raise £25bn a year by the end of the OBR’s forecast period.

In perhaps the biggest surprise of the Budget, Reeves announced she would not extend a freeze on personal income tax thresholds introduced by the previous government in April 2021, which has dragged millions of workers into higher tax bands.

From 2028-29, these thresholds will once again rise in line with inflation, giving workers more headroom for salary growth before they hit the next income tax band.

Until then, the income tax personal allowance (PA) will remain frozen at £12,570 and the higher rate threshold (HRT) at £50,270. Additional rate tax (at 45 per cent) will start at £125,140.

Reeves also made substantial changes to inheritance tax. Currently, full relief from IHT is available on agricultural property and business property, allowing business owners and farmers to pass on property free of tax.

From April 2026, full relief will be capped at £1mn. Assets beyond that level will receive 50 per cent relief, resulting in an effective tax rate of 20 per cent. For shares that trade on non-recognised investment exchanges, such as London’s Alternative Investment Market, relief will be capped at 50 per cent on all assets.

Reeves also said she would extend the freeze in the IHT tax-free allowance of £325,000 from 2028 to 2030, even though she opted not to do so on income tax thresholds.

Labour’s plans to end the tax non-dom rules and replace them with a new system have led to reports of wealthy foreigners fleeing the UK. Reeves confirmed she would “abolish” the regime from 2025, instead introducing a new residence-based scheme, which she said would be “internationally competitive”.

Reeves also confirmed increases to the taxation of profits earned by private equity fund managers, known as carried interest. The chancellor said this would be taxed at a rate of 32 per cent from April, up from 28 per cent now.

She also confirmed that the VAT exemption on private school fees will be removed from January, leading to an additional 20 per cent charge.

The chancellor also promised a clampdown on rogue umbrella companies. These are payroll agencies that take on a contractor’s financial administration, managing their tax and pay — but the sector is unregulated.

Pensions

Reeves announced she would close the “loophole” on inherited pensions, which will be brought into inheritance tax from April 2027. Currently, inheritance tax is typically payable on estates over the value of £325,000.

This measure is likely fundamentally to shift how wealthier people will think about accessing their money in retirement.

The chancellor also confirmed the state pension would increase by 4.1 per cent in April 2025, meaning 12mn pensioners would gain up to £470 from next year. She added that spending on the state pension was forecast to rise by over £31bn by 2029-30.

Reeves said the standard minimum guarantee for pension credit would also rise by 4.1 per cent next year, from around £11,400 per year to about £11,850 a year for a single pensioner.

This would help make up for the loss of winter fuel payments for many pensioners this November and December, she said.

Investment

In a move affecting investors, the chancellor announced that the lower rate of capital gains tax (CGT) will rise from 10 per cent to 18 per cent, and the higher rate from 20 per cent to 24 per cent. This will affect shares sales for investors. These changes will apply from October 30 2024.

Meanwhile, a feared removal of inheritance tax relief on Aim-listed shares at this month’s Budget has happened. Instead, the chancellor will introduce a new 20 per cent rate on Aim-traded shares. This will appeal to some investors as this rate is half of the full IHT amount, the worst-case scenario.

Marcus Stuttard, head of Aim and UK primary markets at the London Stock Exchange, recently estimated that £6.5bn of investment in Aim companies were held through funds specifically marketed towards customers seeking to limit their inheritance tax bill. That compares with Aim’s current total market capitalisation of £45.6bn.

Property

Reeves confirmed the stamp duty surcharge for buy-to-let and second homes will increase by 2 percentage points to 5 per cent. The chancellor said this change will apply from Thursday, which would stop people trying to rush through deals before the rates change.

The chancellor left capital gains tax rates on residential property unchanged. She announced reforms to agricultural and business property relief from inheritance tax, for assets worth more than £1mn.

The Treasury, ahead of the Budget, set out proposals for above-inflation rent increases for people living in social housing in a long-term deal with affordable housing providers.

With no mention of stamp duty thresholds, temporary tax breaks are set to end next spring — meaning larger tax bills for homebuyers.

The chancellor also confirmed plans to restrict the right for social housing tenants to buy their own homes, which had been blamed for reducing the UK’s stock of affordable homes. She said councils would be allowed to keep all of any receipts from the so-called “right-to-buy”. Local authorities had previously been obliged to hand over a proportion of the receipts to the Treasury.

Childcare

The government has committed £1.8bn to expand childcare services in a move that represents a continuation of its predecessors’ plan to roll out 30 hours of free childcare for parents with children aged over nine months in England from September 2025.

Education secretary Bridget Phillipson said last month that 300 new state-funded nurseries would open ahead of the planned rollout, largely by converting empty classrooms in schools.

The sector has already warned it lacks the resources needed to deliver the expansion due to a crippling mix of rising costs, shortages of qualified staff and years of underfunding.

Other measures

The national living wage for workers aged 21 and above will increase to £12.21 per hour from April next year. Announced on Tuesday, the rise represents a 6.7 per cent increase for those aged over 21. For 18- to 20-year-olds, the hourly rate will rise by £1.40 to £10.00 per hour as the government moved towards a single adult rate. The NLW was introduced in 2016 at £7.20 per hour for those 25 and over.

Universal credit and other benefits will increase by 1.7 per cent in April, in line with September’s inflation figures. This will see around 5.7mn households gain £150 on average in 2025 and 2026.

Fuel duty will remain frozen next year and the chancellor will maintain a “temporary” 5p cut that was introduced in 2022 after energy prices rose following Russia’s invasion of Ukraine. The duty will remain at 52.95p per litre.

Alcohol duty will increase from February in line with retail inflation, while a temporary wine easement will also end.