Budget 2025: What Rachel Reeves’ First Budget Means for You

Chancellor Rachel Reeves has delivered one of the most consequential budgets in over a decade — a tax-heavy package designed to stabilise the nation’s finances while promising renewed investment in public services. Presented against a backdrop of sluggish productivity and pressure on household incomes, the Budget sets out a clear message: the government is opting for higher taxes rather than deep spending cuts.

Here are the major announcements and what they mean for households, businesses and the wider economy.

The government expects to raise about £26 billion annually through the new tax and levy measures by 2029/30.

The overall tax burden is projected to hit a record high of ~38% of GDP by 2030–31.

A Record Tax Burden as Thresholds Stay Frozen

The Budget’s biggest revenue source comes quietly: the Chancellor has extended the freeze on income tax and National Insurance thresholds until 2030–31. While rates remain unchanged, the effect of pay rises against static thresholds will gradually pull more people into tax — a phenomenon known as “fiscal drag.”

This long freeze is expected to be one of the most lucrative measures in the budget, raising several billion pounds annually and pushing the overall tax burden to a historic high by the end of the decade.

The freeze is estimated to raise ~£7.6 billion by 2029/30.

Mansion Tax and Higher Levies on Wealth Income

In a major shift for property taxation, the government will introduce a new surcharge on homes worth more than £2 million, taking effect from April 2028. Charges will range from around £2,500 to £7,500 per year depending on property value, and will rise with inflation.

The surcharge bands start from £2,500/year for homes worth £2 m–£2.5 m, rising up to £7,500/year for homes valued £5 m or more (before uprating for inflation).

The surcharge is expected to raise ~£400 million per year by 2029/30.

Alongside this, taxes on property income, dividends and savings will rise by two percentage points at both basic and higher rates — a significant hit for landlords, investors and those relying on income from savings.

Pension Perks Curtailed

From 2029, pension contributions made via salary sacrifice will receive tax benefits only on the first £2,000 of contributions each year. Above that threshold, contributions will be taxed. This marks one of the most significant reforms to pensions in recent years and is aimed at addressing inequalities created by salary-sacrifice loopholes, particularly among higher earners.

This measure alone is expected to raise ~£4.7 billion in 2029/30.

Cash ISA Changes Create Winners and Losers

Cash savers are also affected: the annual Cash ISA limit will drop from £20,000 to £12,000 from April 2027 for most adults. Importantly, over-65s will retain the full £20,000 allowance, a move framed as protecting older savers who rely more heavily on interest income.

Stocks and shares ISAs remain unchanged.

Support for Families and Low-Income Households

One of the budget’s most significant social policy shifts is the scrapping of the two-child benefit cap from April 2026. This change is expected to benefit hundreds of thousands of families and marks a dramatic reversal of one of the most controversial welfare policies of the last decade.

The change is forecast to benefit up to 1.5 million children (depending on region), with an estimated cost to the Treasury of ~£3 billion by 2029/30.

Alongside this, the National Living Wage will rise to £12.71 for adults over 21, while younger workers also receive above-inflation increases.

From next April, the National Living Wage (for 21-plus) will increase by 4.1% to £12.71/hour, while for 18–20-year-olds the rate becomes £10.85/hour; 16–17 year olds see a rise to £8.00/hour.

The government has framed this as progress towards a single adult wage rate, narrowing the gap between younger and older workers.

Fuel duty and regulated rail fares will remain frozen, offering some relief during a period of elevated living costs.

Motoring and Environmental Policy: EVs Face New Road Charges

Electric vehicle owners will see a new “pay-per-mile” road charge introduced from 2028 — roughly 3p per mile for EVs and about half that for plug-in hybrids. The measure reflects declining fuel-duty revenues as the shift to cleaner transport accelerates.

Charge is expected to raise £1.4 billion by 2029/30.

Business Measures and Investment

Businesses in retail, hospitality and leisure will see some relief through lower business rates.

The government also announced reforms to employee-ownership trust incentives and targeted investment in infrastructure and public services — moves designed to stimulate productivity over the medium term.

OBR Leak and Political Framing

Reeves’s budget speech was overshadowed by the unprecedented early release of the OBR’s economic forecasts. She criticised the accidental leak as a “serious error” but used her opening remarks to frame the budget as part of a broader economic rebuild, citing new trade deals with the US, India and the EU, planning reforms, revised fiscal rules and an overhaul of the visa system. Positioning herself against the previous government, she repeated that Labour inherited a £22bn “black hole” in the public finances and argued that higher taxes on the wealthiest were necessary to fund the NHS and stabilise the economy.

Energy Bills: ECO Scheme Scrapped

The chancellor announced that the Conservative-era Energy Company Obligation (ECO) scheme will be abolished. Reeves said the programme cost families £1.7bn a year but delivered limited savings, particularly for those in fuel poverty. Scrapping ECO will reduce annual household energy bills by around £150 next year. Critics warn, however, that ending insulation support could undermine long-term efforts to reduce energy costs and emissions.

Tobacco, Alcohol and the New “Milkshake Tax”

Tobacco duties will continue to rise at two percentage points above RPI, while alcohol duties will increase in line with inflation — continuing the traditional approach of raising revenue from harmful consumer products. Separately, the government is expanding the sugar tax to include dairy-based drinks such as milkshakes and canned lattes, and lowering the sugar threshold for the levy from 5g to 4.5g per 100ml, tightening standards aimed at tackling obesity among young people.

Fuel Duty: Freeze Extended but Rise Likely

Fuel duty will remain frozen until September 2026 — extending a freeze that has lasted since 2010. After that point, the duty is scheduled to rise with inflation, marking what could be the first increase in 15 years unless the government intervenes at the spring statement.

Schools, NHS and Public Services

Reeves reiterated spending review commitments, including £5m for secondary school libraries, £18m for playground upgrades, and a redirection of £4.9bn in projected efficiency savings towards frontline NHS services. This includes hiring more nurses and expanding GP appointment availability, alongside £300m to improve patient-facing technology and the creation of 250 new community health centres.

Welfare Reform and Apprenticeships

The budget confirms reforms to Universal Credit expected to help 15,000 people return to work. At the same time, the government will cut several tax subsidies within the Motability scheme, including removing VAT exemptions for higher-value vehicles and ending relief on insurance premium tax. Funding will also be allocated to make apprenticeships fully free for SMEs, aiming to boost skills and workforce participation.

Growth and Inflation Forecasts

The OBR now forecasts UK GDP growth of 1.5% in 2025 — up from the 1% predicted in March — but has downgraded annual growth expectations for 2026–2030 to around 1.4–1.5%. Inflation is running slightly hotter than expected at 3.5%, easing to 2.5% in 2026 before returning to the 2% target thereafter.

Government Borrowing and Debt

Borrowing is forecast to fall from £138.3bn in 2025–26 to £67.2bn by 2030–31. The government expects a fiscal surplus of £3.9bn in 2029, rising to £24.6bn by 2031, and says the UK is on track to reduce debt faster than any other G7 economy.

Gambling Duty Overhaul

Online gambling taxes will rise sharply. Remote gaming duty will jump from 21% to 40% from 2026, while online sports betting duty will increase to 25%, with high street bookmakers remaining at 15%. Bingo duty will be abolished. The package is expected to raise £1.1bn by 2029–30, although the government acknowledges some bettors may shift to unregulated markets.

Devolution and Regional Investment

Reeves announced £13bn in flexible funding for seven metro mayors to support skills development, infrastructure and business investment. Additional allocations include £370m for Northern Ireland, £505m for Wales and £820m for Scotland. Wales will host two new “AI growth zones” expected to create 8,000 jobs, while Scotland will receive targeted funding for low-carbon projects in Grangemouth and regeneration in Inverclyde and Kirkcaldy.

Energy and Nuclear Expansion

The chancellor pledged to cut regulatory barriers that have slowed investment in nuclear power, following recommendations by adviser John Fingleton. The government says a streamlined approval framework will accelerate deployment of next-generation nuclear technologies.

Business Taxation and Investment Incentives

The budget includes an expansion of entrepreneurial investment schemes, a temporary three-year exemption from stamp duty for UK stock market listings, and the introduction of a 40% investment allowance enabling companies to write off more of their upfront costs. The government will also impose customs duties on all parcels entering the UK to prevent online retailers from undercutting the high street. Meanwhile, capital gains tax relief for employee ownership trusts will be reduced from 100% to 50% after cost estimates ballooned to £20bn.

Economic Outlook: Caution with a Hint of Optimism

While short-term growth forecasts have been nudged upward, the medium-term outlook remains restrained. The Budget does, however, create additional fiscal “headroom,” giving the government more space to fund investment plans without breaching its borrowing rules.

A Budget Defined by Trade-offs

Budget 2025 is unapologetically redistributive: wealthier households, landlords, and high-income savers will shoulder more of the tax burden, while low-income families, young workers and commuters receive targeted support. Its success will depend on whether increased public investment can deliver the productivity boost the UK has long needed.