Reeves spares wages but hits unearned wealth

A string of capital gains tax, inheritance tax and stamp duty changes were the hallmarks of chancellor Rachel Reeves’ first Budget.

Chancellor Rachel Reeves laid out plans for a £40bn tax raid in her first Budget as she spared workers’ wages but took aim at unearned wealth.

In the first Labour Budget in 14 years and the first ever delivered by a woman, Reeves slammed the previous Tory government for ‘playing fast and loose’ with the public finances, leaving a £22bn blackhole. She also accused the Conservative party of failing to disclose all information to the Office for Budget Responsibility, creating a ‘false’ picture of the UK’s balance sheet.

In order to fix the nation’s finances and public services, she confirmed a £40bn package of tax rises, insisting that ‘any chancellor standing here today would have to face this reality and any responsible chancellor would take action’.

‘Change must be felt,’ said Reeves. ‘More pounds in people’s pockets. An NHS that is there when you need it. An economy that is growing, creating wealth and opportunity for all, because that is the only way to improve living standards. And the only way to drive economic growth is to invest, invest, invest. There are no shortcuts.’

Despite the widely trailed Budget, Reeves pulled one surprise out of the red briefcase, confirming the freeze on income tax and national insurance (NI) thresholds will not be extended beyond 2028.

She had been expected to extend the freeze – which was implemented by the previous government in 2022 and ultimately drags more workers into higher rates of tax.

‘Having considered this issue closely, I have come to the conclusion that extending the threshold freeze would hurt working people and take more money out of their pay slips,’ she said.

‘I am keeping every single promise on tax that I made in our manifesto.’

Although employee NI came away unscathed, employer contributions did not, with an increase to 15% from 13.8% from April next year. Reeves also lowered the threshold for when firms starting paying NI to £5,000 from £9,100, which is set to be the Budget’s biggest revenue raiser.

However, the biggest companies will bear the biggest burden, and smaller companies will benefit from an increase in the employment allowance to £10,500 from £5,000, lifting 865,000 employers out of paying NI at all next year. However, all businesses are likely to feel the increase in the national minimum wage, which will be increased to £12.21 an hour next year.

Reeves focused on preserving workers’ pay but took aim at unearned wealth, introducing a raft of tax hikes and changes for those benefiting from growth in assets and inherited money, as well as would-be landlords.

Expanding IHT

Inheritance tax (IHT), arguably one of the country’s most hated taxes but only paid – according to Reeves – by 6% of estates each year, came under the spotlight.

She froze the IHT nil rate band – the threshold at which an estate escapes the 40% tax paid on the owner’s death – at £325,000 for a further two years from 2028 to 2030. The threshold has been on ice since 2009, when an increasing number of estates have been dragged into the tax as property prices increased. The nil rate band is increased to £500,000 if the estate includes a residence passed on to direct descendants, such as a spouse, child or grandchild.

An increased number of people could find their estate pushed into IHT as Reeves used the Budget to confirm inherited pensions will be subject to the tax from 2027. Currently, most pensions are exempt from IHT and not classed as part of your estate when you die making them a simple way to protect your cash from the taxman. However, this is set to change – and raise £1.5bn a year for the Treasury in the process.

Reeves said she was ‘closing the loophole’ created by the previous government, with around 8% of estates to be affected each year, according to the Treasury.

An audible whoop came from the AIM, where rumours had swirled that the IHT relief offered to stocks listed on this high-growth market, which had made them a valuable estate planning tool, would be scrapped.

Instead of losing the entire relief, AIM stocks will only have IHT tax applied to them at a rate of 20%, half the normal rate.

Capital gain pain

Reeves’ maiden Budget confirmed capital gains tax (CGT), paid on gains made on an assets such as shares or a second home, will rise to 24% from 20% for higher rate taxpayers, and increase from 10% to 18% for lower rate taxpayers. This should raise £18bn over the next five years.

The new rules will come into force from April 2025 and Reeves said it was a ‘difficult choice’ to hike the rates, and one that she did not take ‘lightly’.

The annual CGT allowance, which is currently £3,000 following former chancellor Jeremey Hunt’s 50% cut last year, will remain unchanged.

Another target for CGT rises was ‘carried interest’ paid to private equity managers when they make profits from deals. Previously taxed at 28%, they will now pay 32%, affecting around 0.01% of the UK population, or just 6,440 people a year.

Second homes scare

Reeves put the boot in to would-be landlords and property investors with the CGT increase resulting in a steeper bill for selling a property that isn’t a main home, added to which she also increased stamp duty.

Those buying a second property, whether a buy-to-let or holiday home, already face higher levels of stamp duty, paying 3% of the value up to £250,000 versus a zero tax rate for those buying a home to live in. The 3% tax has been increased to 5% with effect from tomorrow – a possibly frightful prospect for some this Halloween.

Reeves said the Labour manifesto ‘committed to reforming stamp duty land tax to raise revenues while supporting those buying their first home’ and the tax rise would ‘support over 130,000 additional transaction from people buying their first home, or moving home, over the next five years’.

What else was announced:

  • The state pension will rise in line with average earnings, increasing by 4.1% in April to £230.30 a week, or £11,975 a year, which is equivalent to a £473 hike.
  • The ‘non-dom’ tax regime was abolished for those who live in the UK but are domiciled in another country for tax reasons, meaning they do not pay UK tax on money earned elsewhere in the world. Reeves will implement a new ‘residence-based scheme’ to replace the ‘outdated’ non-dom rules.
  • The fuel duty freeze was continued in a surprise move. Reeves had been expected to reverse the 5p per litre freeze on petrol and diesel – which has been in place since 2011 – and costs the Treasury £3bn a year.
  • Smokers and vapers will pay more tax after Reeves announced a new vaping tax and increased tobacco duty. A flat duty tax will be levied on vapes from October 2026 and duty on hand-rolling tobacco will increase 10% this year.
  • The soft drinks levy – more well-known as the sugar tax – will increase to account for inflation, making fizzy drinks more expensive.
  • The cost of a flight will increase £2 per economy passenger as Reeves increased air passenger duty but if you’re flying in your private jet, you will be hit by a 50% increase in the levy.
  • Reeves took ‘a penny off the pint in the pub’, cutting draught duty by 1.7%, which those watching the Budget may want to partake in after a mammoth hour-and-20-minute-long speech from the chancellor.