In UK’s Labour government’s first budget since 2010 — and the first by a woman finance minister in that country — Chancellor Rachel Reeves has committed to “invest, invest, invest” to rectify what she describes as the economic “black hole” left by previous governments.
With £40 billion in tax hikes, Reeves aims to “fix the foundations” of the economy while reinvesting in public services.
Reeves’ 77-minute speech outlined significant tax changes, increased support for pensioners and low-income households, and a freeze on fuel duty amid rising living costs.
Pensions
The chancellor upheld Labour’s commitment to the “triple lock” for pensions, which guarantees pension increases based on the highest of three measure — average earnings, inflation, or 2.5%. For 2025-26, this means a 4.1% rise, or up to £470, for over 12 million pensioners. Reeves also raised the pension credit standard minimum guarantee by 4.1%, lifting annual income from £11,400 to £11,850 for single pensioners.
Inheritance tax adjustments
Addressing inheritance tax, Reeves announced new inclusions and reforms effective in 2027. Pension pots passed down will now fall under inheritance tax, ensuring broader tax coverage. While only 6% of estates currently pay inheritance tax, the chancellor extended the freeze on inheritance thresholds until 2030.
Estates can still inherit the first £325,000 tax-free (£500,000 with a residence for direct descendants), with assets exceeding £1 million remaining exempt when passed between spouses. For farms and businesses, assets over £1 million will receive 50% relief, marking a move to equalise tax responsibilities across different types of wealth.
Universal credit reforms
As part of Labour’s pledge to combat poverty, Reeves introduced a new “fair repayment rate” for households receiving universal credit, reducing the deduction cap from 25% to 15% of their standard allowance. This measure is expected to ease financial pressure on approximately 1.2 million low-income households, with an estimated annual benefit of £420 per family. Additionally, universal credit and personal independence payments (PIP) will increase by 1.7%, matching inflation.
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Alcohol duty changes
In a move to support the hospitality sector, Reeves announced a 1.7% cut in draught duty for pub-served drinks, shaving 1p off each pint. This follows a similar strategy from prior governments to differentiate between pub-sold and retail alcohol, supporting businesses that were heavily affected by pandemic-related losses.
Fuel duty frozen
Reeves opted to retain the 5p per litre cut on fuel duty and freeze any further increases for an additional year, costing the treasury an estimated £3 billion. The chancellor argued that increasing the duty during a period of high living costs would be “the wrong choice.” Without the freeze, fuel duty was set to rise by 7p per litre, which Reeves claims would place undue strain on working households amidst global economic uncertainty.
National insurance reforms
Businesses will face increased national insurance contributions, with the employer rate rising from 13.8% to 15% and the earnings threshold decreasing from £9,100 to £5,000 in April 2025. This measure is projected to raise £25 billion by the forecast period’s end.
To mitigate the impact on small enterprises, Reeves increased the employment allowance from £5,000 to £10,500, allowing 865,000 small businesses to pay no national insurance at all. This support will enable small companies to hire up to four full-time workers on minimum wage without incurring national insurance liabilities.
Also read: UK minimum wage to rise by 6.7% next year, exceeding inflation
Economic outlook
The Office for Budget Responsibility (OBR) predicts modest economic growth of 1.1% this year, with an uptick to 2% expected next year as the economy stabilises under Labour’s initiatives. Inflation, projected at 2.5% for this year, is forecast to fall to 2.3% by 2026.
Labour’s budget extends to social investments, including an extra £22.6 billion for the NHS in England and £6.7 billion for education, showing Reeves’ focus on not only boosting economic resilience but also bolstering social safety nets.