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Britain’s chancellor of the exchequer Rachel Reeves poses with the red budget box outside her office on Downing Street in London, Britain, October 30 2024. Picture: REUTERS/ISABLE INFANTES
Britain’s chancellor of the exchequer Rachel Reeves poses with the red budget box outside her office on Downing Street in London, Britain, October 30 2024. Picture: REUTERS/ISABLE INFANTES

London — Britain’s new chancellor of the exchequer Rachel Reeves announced the biggest tax increases in three decades in her first budget, as she accused the Conservatives of leaving public services broken when they lost July's election after 14 years in power.

Reeves said she would raise taxes by £40bn a year — much of it falling on businesses — to cover a £22bn shortfall inherited by her Labour Party, the lack of compensation payments, including for victims of an infected blood scandal, and underfunding of public services.

“Any chancellor standing here today would face this reality,” Reeves said in her budget speech.

“And any responsible chancellor would take action. That is why today, I am restoring stability to our public finances and rebuilding our public service.”

Reeves has said she will not let public debt balloon, mindful of how former Conservative prime minister Liz Truss sent the bond market into a tailspin two years ago with unfunded tax cut plans. Initial reaction to Reeves speech suggested investors were taking her plans well, with government bond prices rising further as she addressed parliament.

According to the Institute for Fiscal Studies think-tank, tax hikes of £40bn would be equivalent to 1.25% of economic output, surpassed in recent history only in 1993 by a budget plan under the Conservatives which raised taxes to shore up the public finances after a recession and currency crisis.

Reeves said she would raise the rate of social security contributions paid by employers by 1.2 percentage points to 15% from April next year, and lower a threshold at which firms start to pay it — moves which would raise an extra £25bn a year in five years’ time. She also reduced the threshold at which businesses start paying national insurance social contributions on each workers’ salary from £9,100 a year to £5,000. The combined changes will raise £25bn a year by the end of the forecast period.

Company bosses have warned that higher taxes on them, combined with planned new protections for workers and an increased minimum wage, could undermine Labour’s promises to turn Britain into the fastest-growing Group of Seven economy.

Reeves announced a string of other revenue-raising moves including changes to the tax rules on capital gains and inheritances and tax paid by private equity executives and non-domiciled residents.

Capital gains tax for most assets would increase to 18% from 10% at the lower rate and increase to 24% from 20% for higher earners, saying changes to the regime would raise £2.5bn. 

The inheritance tax threshold freeze would be extended until 2030, she said. Inheritance tax (IHT) is charged at 40% on the value of estates above £325,000, a threshold which has not changed since 2009. Reeves said that level would be extended to keep the first £325,000 of any estate inherited tax-free. That figures rises to £500,000 if the estate includes a residence passed to direct descendants, and £1m when a tax-free allowance is passed to a surviving spouse or civil partner. However, from April 2027, inherited pension pots would be subject to inheritance tax, Reeves said, and from April 2026 agricultural property relief and business property relief would be reformed.

Prime Minister Keir Starmer had warned “those with the broadest shoulders” will have to pay more tax.

But she ruled out making more individuals pay basic and higher income tax rates by extending a freeze on the threshold for payments beyond its scheduled expiry in the 2028/29 tax year.

She also extended a freeze on fuel duty and a cut a tax on beer served in pubs.

The defence ministry would receive an additional £2.9bn next year and an annual £3bn of support for Ukraine would continue for “as long as it takes”.

Reeves also said Britain’s economy was forecast to grow by more than expected this year and in 2025 but by less than previously forecast in the following three years.

Reeves relaxed the government’s self-imposed fiscal rules in an effort to keep in check the current budget deficit, which measures the difference between revenues and day-to-day spending. She said her "stability" rule would bring the government’s current budget into balance by the 2029/30 financial year. From there, it would commit to run a balanced current budget in the third year at every budget.

Reuters 

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