Rachel Reeves has presented her latest Budget, unveiling tax increases totaling £26 million that will impact a significant number of workers. She emphasized the importance of everyone contributing while striving to keep the burden minimal through tax system reforms aimed at fairness and ensuring the affluent bear the heaviest load.
Accidentally leaked by the Office for Budget Responsibility before her speech in the House of Commons, additional Budget measures include significant changes for savers and the removal of the two-child benefit cap. A Mirror Budget calculator, developed by Blick Rothenberg, is now available to help individuals understand how these changes will affect their finances.
The freeze on tax thresholds for an extra three years will lead to higher tax payments for many workers as their incomes rise, a phenomenon known as “fiscal drag.” This method, often referred to as a stealth tax, enables the government to collect more revenue without officially increasing tax rates.
The income tax personal allowance, currently set at £12,570, was initially planned to be frozen until April 2028 but will now be extended until April 2031. The basic tax rate of 20% applies to earnings above £12,570, followed by the higher rate of 40% on earnings surpassing £50,270 and the additional rate of 45% on earnings above £125,140, with no changes announced by the Chancellor.
Starting next April, the minimum wage will increase, with workers aged 21 and over seeing a 4.1% rise to £12.71 per hour. The minimum wage rates for 18 to 20-year-olds, 16 to 17-year-olds, and apprentices will also see hikes, benefiting a total of 2.7 million workers, according to the Government.
In a notable move for savers, the Chancellor confirmed a reduction in the cash ISA limit, affecting individuals under 65. The annual cash ISA limit will decrease from £20,000 to £12,000 starting April 2027, while the overall ISA limit remains at £20,000, allowing a split between cash and stocks and shares ISAs.
Moreover, changes to tax rates on savings interest were announced, with adjustments set to take effect from April 2027 for different taxpayer categories. The state pension will increase by 4.8% from next April, aligning with the triple lock mechanism, but changes to salary sacrifice schemes may impact pension savings.
Further adjustments include the removal of luxury vehicles from the Motability scheme, a £150 reduction in average energy bills by discontinuing the Energy Company Obligation scheme, along with freezes in NHS prescription costs and rail fares until 2027. However, council tax increases for costly homes and a phased fuel duty rate return post-August 2026 are also outlined.
Starting in April 2028, drivers of electric cars will face mileage-based taxes, while smokers and drinkers will encounter higher costs due to rising tobacco and alcohol duties. Additionally, consultations on reforming the Lifetime ISA and potential replacements for first-time buyers are planned, addressing concerns raised by financial experts.