Rachel Reeves Announces End To Income Tax Threshold Freeze In Her First Budget
Chancellor Rachel Reeves delivered her first Budget on Wednesday (Alamy)
6 min read
Chancellor Rachel Reeves has announced that she will end the threshold freeze on income tax and national insurance, but raised a number of other taxes and increased spending by billions of pounds in her first Budget.
Reeves announced her first Budget — the first Labour Budget in 14 years and the first ever Budget delivered by a female chancellor — to the House of Commons on Wednesday afternoon.
Kickstarting economic growth is the Labour Government’s number one mission, aiming to hit the highest sustained growth rate in the G7 by the end of this Parliament.
Office for Budget Responsibility analysis published alongside the Budget on Wednesday, however, suggested the plans would not trigger a significant increase in growth, with the independent body downgrading some of its previous growth forecasts.
The party led by Prime Minister Keir Starmer has also put improving public services at the centre of its agenda for power.
The Chancellor said in her speech that the only way to do this would be to “invest, invest, invest”, and compared this Budget to previous historic Budgets delivered by the Labour governments in 1945, 1964, and 1997.
Reeves’ Budget will raise a number of taxes in order to help increase day-to-day spending from 2024-25 onwards by 1.5 per cent in real terms. Spending will increase by almost £70bn over the next five years, a little over 2 per cent of GDP, with the Chancellor claiming these decisions prioritise the interests of “working people”.
“I said there would be no return to austerity, and that is the choice I have made today,” she said.
Shortly after the General Election in July, Reeves said she had uncovered a “£22bn black hole” in the public finances left by the previous Conservative government, and that she would therefore have to make “difficult decisions” in her first Budget. These decisions have included multiple tax rises, particularly for businesses, with this Budget raising taxes by £40bn in total.
However, she made the surprise announcement that she would end the threshold freeze on income tax and national insurance. The previous government froze these thresholds, resulting in some workers being dragged into higher tax bands, but Reeves said that continuing this policy would “hurt working people” and “would take more money out of their payslips”. Personal tax thresholds will now be uprated in line with inflation again from 2028-29.
Labour promised in its election manifesto not to raise taxes on “working people”, including national insurance.
However, as expected, Reeves announced that national insurance for employers will be increased by 1.2 per cent to 15 per cent from April 2025. The level at which employers start paying national insurance on each employee’s salary will also be decreased from £9,100 per year to £5,000, raising £25bn per year.
“I know that this is a difficult choice, I do not take this decision lightly,” Reeves said.
She added that she knew the impacts of this measure will be felt “beyond businesses, too”, and therefore announced that to soften the blow, 865,000 small businesses will not pay any National Insurance at all next year, as the Employment Allowance will be increased from £5,000 to £10,500.
While overall alcohol duty will continue to increase in line with RPI from February next year, draught duty will be cut by 1.7 per cent, which Reeves said would mean a “penny off a pint in the pub”.
The Chancellor also announced an increase in the rate of Air Passenger Duty on private jets by a further 50 per cent.
Alongside an increase in overall day-to-day spending, Reeves announced a £22.6bn increase in the day-to-day health budget, which would be the largest real-terms growth in day-to-day NHS spending outside of Covid since 2010. There will also be a £3.1bn increase in the NHS capital budget over this year and next year.
Describing many NHS buildings as “in a state of disrepair”, Reeves said there will be £1bn of health capital investment next year to address the backlog of repairs across the NHS estate.
Recent Savanta research for PoliticsHome found strong public support for protecting the NHS from sprending cuts.
The Department for Education will be provided with £6.7bn of capital investment – a 19 per cent real terms increase from this year – including £1.4bn to rebuild over 500 schools in the greatest need, and a further £2.1bn to improve school maintenance.
Investment in breakfast clubs will be tripled and the core schools budget increased by £2.3bn next year to hire “thousands more teachers into key subjects”. £1bn in extra funding will be provided for reforming special educational needs provision.
The Chancellor also announced a real-terms funding increase for local government next year, including £1.3bn of additional grant funding to deliver essential services with at least £600m in grant funding for social care and £230m to tackle homelessness and rough sleeping.
Greater Manchester and the West Midlands will be the “first mayoral authorities to receive integrated settlements from next year, giving Mayors meaningful control of the funding for their local areas”.
The Budget included multiple packages for workers: the National Living Wage will be increased by 6.7 per cent to £12.21 an hour, as recommended by the Low Pay Commission. There will also be a move towards a single adult rate phased in over time, with the National Minimum Wage for 18-20 year olds increased in the Budget by 16.3 per cent, taking it to £10 an hour.
The previous government’s policy was for the bus fare cap to end this December, but Reeves announced the new Government will extend the cap for a further year, setting it at £3 until December 2025.
Right to Buy discounts will be reduced and local authorities will be able to retain the full receipts from any sales of social housing to reinvest back into their existing stock and into new supply.
Specific funding of £11.8bn will be provided to compensate those affected by the Infected Blood scandal, as well as £1.8bn to compensate victims of the Post Office Horizon scandal.
Reeves restated the Government’s commitment to the triple lock on pensions, and said that fuel duty would be frozen again next year – despite it costing over £3bn to freeze it for another year.
“In these difficult circumstances, while the cost of living remains high and with a backdrop of global uncertainty, increasing fuel duty next year would be the wrong choice for working people,” she said.
These key announcements came alongside changes to the fiscal rules, which will give the Government more space to borrow money in order to invest in public services. The Chancellor announced this will allow the Government to invest an additional £100bn over the next five years in capital spending.
Many of the measures in the Budget had previously been trailed by ministers and officials, in an attempt to prevent spooking the markets and leading to the same market turmoil seen in the aftermath of the 2022 mini-budget announced by former Chancellor Kwasi Kwarteng under then-prime minister Liz Truss.
The Chancellor confirmed previously announced policies such as imposing VAT on private school fees and added that legislation would be introduced shortly to remove private schools’ business rates relief from April 2025.
She also confirmed the Government would go ahead with abolishing the non-domicile tax status.
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