Chancellor Rachel Reeves has unveiled an Autumn Budget that raises taxes by £26 billion – a package of hikes that will lift the UK’s tax take to an all-time high of 38% of GDP by 2030-31. This 2025 Budget combines a slew of new tax measures (from frozen income tax thresholds to a so-called “mansion tax” on pricey homes) with higher welfare spending to scrap the two-child benefits cap. Below, we break down the key components, historical context, and reactions to Reeves’ tax-heavy Budget – one that reflects Labour’s priorities but also tests its campaign promises and the economy’s resilience.
Key Tax Measures: £26 Billion in Increases
Reeves’ Budget leans squarely on tax rises rather than spending cuts to close the fiscal gap. The Office for Budget Responsibility (OBR) confirmed that the Budget’s policies will raise taxes by £26 billion by 2029-30, primarily through an extended freeze in tax thresholds and a host of smaller tax hikes. Table 1 summarizes the major tax policy changesand their expected revenue impact:
| Tax Policy | Details | Estimated Revenue Impact |
|---|---|---|
| Income Tax Threshold Freeze (extended 2028–31) | Personal income tax allowances & bands frozen 3 extra years(through April 2031). Dragging more earnings into higher tax brackets (a “stealth tax”). | £12.7 billion by 2030-31 (largest single raiser) |
| Salary Sacrifice NI Charge (from 2029) | National Insurance contributions to apply on employer pension contributions above £2,000 when made via salary sacrifice. Aimed at curbing an often high-earner tax perk. | £4.7–5 billion by 2029-30 (OBR estimate) |
| “Mansion Tax” – Council Tax Surcharge (2028) | New annual levy on expensive homes: £2,500 for £2–2.5 m homes, up to £7,500 for £5 m+ homes. Implemented as a high-value council tax surcharge, not a % value tax. | £400 million in 2029-30 (small revenue, mainly symbolic) |
| Dividend & Interest Tax Hike (from 2026) | Dividend tax rates up 2 percentage points (basic rate to 10.75%, higher to 35.75%). Similar 2-point rise on tax rates for rental and savings interest income. | ~£1.2 billion per year from dividends alone by 2027 (combined ~£2 billion/yr from all three by 2029). |
| Remote Gambling Duty (from 2026) | Online gambling taxes sharply increased. Remote casino duty jumps from 21% to 40%; a new 25% duty on online sports betting (retail betting stays 15%). Bingo duty cut to 0%. | £1.1 billion by 2029-30 (after accounting for reduced betting activity) |
| Electric Vehicle Road Tax (from 2028) | Per-mile road pricing for EVs: 3p/mile for electric cars (1.5p for plug-in hybrids) on top of standard Vehicle Excise Duty. Addresses falling fuel duty as EVs rise. | £1.4 billion by 2029-30 (eventual ~£1.9 billion a year when fully ramped) |
| Cash ISA Limit Cut (from 2027) | Annual tax-free cash ISA allowance reduced from £20,000 to £12,000 (under-65 savers). Over-65s keep the £20k limit; stocks & shares ISA limit unchanged at £20k. | Modest revenue impact (encourages investment over cash hoarding; some interest earnings now taxable). |
Table 1: Major tax policy changes in Budget 2025 and projected revenue impacts. Sources: OBR and Financial Times.
As shown above, freezing income tax thresholds is by far the biggest revenue-raiser – an estimated £12.7 billion by 2030-31. By extending the freeze beyond 2028 (a policy the previous Conservative government began), Reeves will pull millions more workers into higher tax brackets via fiscal drag. This stealthy approach avoids explicit rate hikes but “will hurt working people”, Reeves admitted, as pay rises get taxed more heavily. The Chancellor had earlier ruled out such threshold freezes, calling them unfair, yet faced with a £30 billion fiscal hole, she reversed course.
Other notable tax measures include a national insurance charge on salary-sacrifice pensions (expected to net ~£5 billion a year by 2029) and a new “mansion tax”– actually a set surcharge on council tax for homes over £2 million. Labour has long floated a mansion tax on the wealthy; this scaled-back version will raise only ~£0.4 billion and is “not a huge revenue raiser”, according to analysts. It may, however, satisfy calls for wealthier homeowners to contribute more. The surcharge will be annual and banded – from £2,500 up to £7,500 for the £5 million+ bracket – thus avoiding a full property revaluation or broad new wealth tax.
Reeves also targeted sectors seen as undertaxed: online gambling companies face a steep duty hike (remote gaming duty up to 40%), forecast to net £1.1 billion by 2030 even after accounting for punters betting less or shifting to untaxed black markets. Meanwhile, electric vehicle (EV) owners will start paying road taxes – a 3p-per-mile charge from 2028 – to ensure they contribute to road upkeep as fuel duty revenues decline. The OBR expects this EV tax to raise nearly £2 billion annually once fully phased in, though it could slightly discourage EV uptake in the coming years. Smaller tweaks – like cutting the cash ISA allowance to £12k (except for pensioners) – round out a “far-reaching Budget” of tax changes. Notably, headline rates of income tax, VAT, and NIC remain unchanged, which Reeves argues means she kept Labour’s pledge not to raise rates on working people – instead opting for these indirect or targeted hikes.
Welfare Spending and the Two-Child Cap Abolition
On the spending side, Reeves used part of the extra tax haul to reverse controversial welfare policies. Most significantly, she abolished the two-child benefit cap, a policy that since 2017 has denied additional Universal Credit or tax credit allowances for a family’s third and subsequent children. From April 2026, the two-child limit will be scrapped, a move long demanded by anti-poverty campaigners and many Labour MPs. The reform will cost over £3 billion a year by 2029-30 and directly benefit an estimated 500,000 low-income families, who stand to gain about £5,000 each per year in support. In fact, removing this cap won the biggest Labour cheer of the day in Parliament.
More broadly, the Chancellor allocated roughly £10 billion in extra welfare spending over the forecast period. Besides the child cap reversal, this includes scrapping planned cuts: for example, Labour has U-turned on £5 billion of welfare cuts that had been penciled in by Reeves last year under pressure to find savings. She also reversed a proposal to scale back winter fuel payments by £1.3 billion. The net effect is a sizeable boost to social security outlays – reinforcing Reeves’ claim that there will be “no return to austerity” on her watch. “Working people demanded and deserved change,” Reeves said, highlighting that higher taxes on the wealthy are funding these welfare improvements.
Critics, however, argue that “working people are paying higher taxes to fund extra benefits” for others. Conservative MPs seized on the optics of taxing broad swathes of workers (via stealth freezes) “to fund extra benefits, especially to families with large numbers of children”. In other words, Labour is redistributing from middle and higher earners to lower-income households – a classic progressive stance, but one that the opposition portrays as penalizing workers. Chancellor Reeves counters that the overall package is about “fairness” and “strengthening Britain”, insisting that those with the broadest shoulders (higher earners and owners of wealth) contribute more to fix the public finances while vulnerable families get much-needed relief.
Tax Burden to Hit Historic Highs Amid Slow Growth
The Budget will push the UK’s tax burden to its highest level in modern history. By the end of this Parliament, government revenue is projected to reach about 38% of GDP – an all-time high in OBR records. (For context, the tax take hovered around 33–34% in the late 2010s, and even in the high-tax 1960s it briefly hit ~35%.) In fact, this is now the third-largest tax-raising budget since the OBR’s creation in 2010, surpassed only by emergency budgets in March 2021 (pandemic response) and October 2024 (Reeves’ own first budget).
Figure 1: UK tax revenue as a percentage of GDP, historical trend and OBR forecast. The tax burden is on course to reach 38% by 2030-31, the highest on record. Sources: OBR, Financial Times.
Driving this record-high tax burden is a combination of policy choices and economic factors. Last year’s post-election budget raised taxes by £40 billion (the biggest hike since the early 1990s), and now Reeves is adding another £26 billion. In part, these moves simply catch up with rising spending needs – for example, more funding for the NHS, schools and social care – after a decade of tighter budgets. But they also reflect weak economic growth which has left a persistent revenue shortfall. Notably, the UK’s GDP growth has effectively stalled, rising just 0.1% in Q3 2025 (down from 0.3% in Q2). With the economy barely above water, raising taxes to this extent is a delicate gamble: it risks further damping growth, yet not raising them could undermine fiscal credibility.
The Chancellor’s defense is that much of the heavy lifting falls on those most able to pay – “the wealthy and business” – and that investing in children and welfare now will pay long-term dividends. Still, observers note the uneven impact: “ordinary Labour voters will take a big hit from the chancellor’s tax hikes,” the Financial Times writes, referring to middle-income households dragged into higher taxes via frozen thresholds. While Labour has avoided direct tax rate increases on basic earnings (honoring its manifesto in letter if not spirit), fiscal drag will over time erode take-home pay growth for millions. This comes at a time when inflation, though falling, remains above target (OBR now expects 3.5% inflation in 2025, higher than forecast in spring).
Economically, the Budget has a somewhat mixed effect. The OBR’s David Miles characterized it as an “old-fashioned Keynesian demand boost in the near term” (because welfare increases and investments will support spending), even as the tax rises tighten fiscal policy later. Indeed, Reeves chose to delay or backload several major tax measures – for example, the income tax freeze extension only bites after 2028, and the big pension NI change starts in 2029. This means the pain is partly postponed to the second half of the decade, by which time (crucially) the next general election will have passed. Some analysts caution that “back-ended tax increases lower the credibility” of the plan. “Some of the big tax rises only kick in after the next election,” noted Nicolas Trindade, a portfolio manager at AXA IM, which could call into question the commitment to follow through. In other words, investors wonder if a future government (even a re-elected Labour one) might waver on these delayed hikes when the time comes.
Rebuilding Fiscal Headroom – and Market Confidence
A key rationale for Reeves’ tax-raising spree is to restore fiscal headroom – a safety buffer in the public finances that reassures markets. After taking office, Reeves initially left a wafer-thin £9.9 billion margin against her borrowing rule. That margin evaporated over 2025 due to higher interest costs and lower growth. Investors had warned that failing to rebuild headroom to £15–20 billion could force yet another emergency budget next year and “damage Britain’s standing in bond markets”. Reeves clearly heeded this warning. Thanks to the new tax measures (and some optimistic forecasting), the OBR now projects a £21.7 billion surplus on the current budget by 2030-31 – roughly £21.7 billion of headroom against her fiscal mandate to balance the books. This is almost double the buffer she had last spring, marking a significant improvement.
Crucially, bond market reaction to the Budget has been positive so far. The premature leak of the OBR report (see next section) actually sent UK gilts rallying, as traders saw headlines of higher taxes and prudence. Yields on UK 10-year bonds dipped, and the pound strengthened slightly, reflecting relief that fiscal discipline was being maintained. “Higher than expected headroom is definitely welcomed, and should stop being a distraction for the market,” said AXA’s Nicolas Trindade, “but the back-ended tax increases [do] lower the credibility of the tightening plans.” On balance, investors appear reassured that Reeves is “taking fiscal consolidation seriously” – a stance that could, somewhat paradoxically, create space for the Bank of England to cut interest rates sooner if inflation permits. In fact, Reeves is “pinning her hopes on further [BoE] rate cuts…as soon as December” to stimulate growth and ease the debt interest burden.
It’s worth noting that this Budget’s fiscal tightening is front-loaded in credibility but delayed in effect. By raising taxes now (legislatively) yet implementing some changes later, Reeves aims to satisfy bondholders without immediately throttling the economy. The OBR calculates that around three-fifths of the 1% of GDP increase in the tax burdencomes from these new policy measures, with the rest due to weaker economic growth projections. If growth continues to underperform, that headroom could prove illusory – but for now, Reeves has bought herself fiscal breathing room and placated the City.
Political Reactions: Promises Kept or Broken?
Politically, the Autumn Budget has drawn sharp reactions across the spectrum. Conservatives lambasted it as a litany of broken promises and a return to high-tax, high-spend government. Opposition leader Kemi Badenoch called the budget a “total humiliation” for Reeves, pointing out that the Chancellor had promised her £40 billion “Halloween” Budget last year would be a one-off, “once-in-a-parliament” tax rise. “She has broken every single one of her promises,” Badenoch said, accusing Reeves of raising taxes on ordinary workers after vowing not to. The Tory leader even quipped that “last year we had the horrors of the Halloween Budget, this year it’s the Nightmare Before Christmas”, painting Reeves as an unwelcome guest who has “eaten all the Quality Street” – a colorful metaphor for raiding people’s finances.
Reeves vigorously defended her actions, claiming “I have kept every single one of our manifesto commitments” on tax. Technically, she has a case: Labour’s manifesto promised no increases to the main rates of income tax, VAT or National Insurance – and indeed, none of those rates went up. Instead, Reeves froze thresholds (a measure not explicitly ruled out) and raised taxes on dividends, property, and niche areas like gambling. She also delivered on scrapping the child cap, a move many in her party consider morally imperative despite its cost. “Working people will benefit from better services and a stronger safety net,” the Chancellor argued, “and we’re asking the wealthy to pay a bit more – that’s fairness.”Still, the optics are tricky for Labour: before the election they criticized stealth taxes and austerity; now in government, they are embracing stealth taxes (threshold freezes) and touting fiscal restraint.
Within Labour’s own ranks, most MPs have rallied behind Reeves, given the popular welfare measures. The scrapping of the two-child cap was hailed as a “major win” by Labour’s left wing. “Very good news on child poverty, gambling taxes and mansion taxes,” cheered one Labour backbencher. However, some feel the Chancellor could have gone further in taxing the rich. Veteran MP John McDonnell welcomed the wealth taxes but said they “don’t go far enough”, lamenting that freezing tax thresholds offsets much of the benefit of other progressive measures and leaves living standards “at a standstill”. This hints at a lingering rift: while Reeves is positioning Labour as fiscally responsible and avoiding radical moves (no new taxes on millionaires beyond the council surcharge, for example), the party’s socialist wing would prefer a bolder redistribution.
From an investor and business perspective, reactions are mixed but not panicked. City analysts note that Reeves “swerved” any major new taxes on banks or energy companies (bank shares actually rallied on news no windfall tax was imposed). By sticking to previously flagged measures, she avoided shocking the markets. Some business groups worry that higher dividend and capital taxes could deter investment, but others are relieved that corporation tax and VAT were untouched in this budget. In sum, while the opposition will continue to hammer the “tax on working people” narrative, Reeves appears to have convinced many stakeholders that these tough measures were necessary to clean up the public finances after years of underperformance.
OBR Forecast Downgrade and the Accidental Leak
Underscoring this Budget was a sobering economic backdrop: the OBR sharply downgraded the UK’s growth outlook, citing poor productivity. In a striking admission, the OBR cut its forecast for trend productivity growth by 0.3 percentage points per year, a seemingly small figure that has big implications. By 2029-30, that productivity downgrade means the economy (and thus tax revenues) would be worse off by about £16 billion in that year alone. This was a major reason Reeves needed to find more revenue. She even blamed the downgrade on the previous government, saying it was part of “the Tories’ legacy” of low growth. The net result: the OBR now expects UK GDP to grow only 1.5% annually in the latter 2020s, versus ~1.8% previously – an era of sluggish growth that makes a 38% tax burden harder to sustain without pain.
In an extraordinary twist, the OBR’s full budget report was accidentally published early, turning the usual budget day script on its head. About 45 minutes before Reeves rose to speak in the Commons, the OBR’s Economic and Fiscal Outlook (which contains all the key forecasts and an assessment of the Budget) went live on their website due to a “technical error”. This unprecedented leak meant MPs and journalists already knew the headline outcomes – including the 38% GDP tax take and the £26 billion tax rise – before the Chancellor said a word. Reeves, finding out moments before delivering her speech, was reportedly “scribbling notes” with an aide in the Commons to adjust to the situation. During her address, opposition MPs heckled, “We’ve already read it – surprise us!”.
The OBR quickly apologised for the blunder, calling it a technical lapse and promising an investigation. But the political fallout was immediate. Tory leader Badenoch said the error made Britain look like a “shambolic laughing stock”, even suggesting Reeves “should consider resigning” – ostensibly not for the leak (which wasn’t her fault) but for presiding over the chaos. Labour MPs, on the other hand, “shook their heads” in frustration at the OBR, worrying it fed a narrative of incompetence just as they try to prove their credibility. Historically, budget leaks have been serious (in 1947 a Chancellor resigned after a leak to a newspaper). In this case, no such outcome befell Reeves – but it certainly marred the rollout of her Budget. For a government that has dealt with U-turns and communication missteps in recent months, the OBR’s gaffe was an unwelcome distraction on a day meant to showcase Labour’s economic management.
Despite the leak drama, markets were “unruffled” by the Budget itself. Once the dust settled, what mattered to investors was that the numbers added up and the fiscal targets were met with room to spare. The OBR’s inadvertent early release may have actually helped by telegraphing reassurance to bond traders a bit sooner. As one London economist put it, he was in “a state of shock” seeing the OBR headlines cross his screen early, but the content “pushed the pound and UK bond prices higher.” In short, Reeves’ thunder may have been stolen, but her fundamental message landed: the UK is tightening its belt – carefully, and in a way aimed at pleasing both the public and the markets.
Conclusion
Rachel Reeves’ second budget is a high-stakes balancing act. It boldly raises taxes on wealthier individuals and various niches to record levels, using those funds to shore up Britain’s finances and invest in social welfare. It has drawn applause for tackling child poverty (by ending the two-child cap) and for fiscal responsibility, but also criticism for burdening workers via stealth and backpedaling on earlier assurances. The UK now faces the coming years with a historically high tax load – nearly two-fifths of national income – at the same time as economic growth is near standstill. Whether Labour can deliver better public services and higher living standards under these constraints will be the ultimate test of this Budget’s success.
What is clear is that Reeves has decisively broken with the era of low-tax, low-spend governance. The Autumn Budget 2025 signals that Britain is moving into a new fiscal chapter: one of higher taxation to fund public priorities and regain economic credibility. As the Chancellor herself put it, “working people demanded change”. Her challenge now is to ensure that change pays off – by reviving a stagnating economy and proving that a fairer, more secure Britain can be built without losing the confidence of those who invest in it.
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