Chancellor raises taxes by ￡26bn in Budget

Rachel Reeves has set out tax-raising measures worth ￡26bn in a Budget speech that was pre-empted by the accidental publication of the main measures by the Office for Budget Responsibility.

The ￡26bn in tax increases by the end of the parliament come after last year’s Budget raised taxes by ￡40bn.

The increases will be achieved through a freeze of income tax thresholds, a raid on salary sacrifice schemes and a range of smaller measures, more than offsetting extra spending of ￡11.3bn.

The OBR predicted the tax take would increase to a record high of 38.3 per cent of GDP by 2029-30, a rise of 0.8 percentage points on an earlier March forecast.

Reeves also said that the government would have ￡22bn in fiscal headroom — the budgetary room for manoeuvre without breaking its own debt rules.

The chancellor opened her speech to the House of Commons on Wednesday by chastising the OBR for the accidental early release of its forecasts, calling it “disappointing” and a “serious error”.

The body’s forecast for UK economic growth in 2026 has been slashed to 1.4 per cent from the 1.9 per cent expected in March.

But growth this year is estimated at 1.5 per cent, up from 1 per cent previously estimated, thanks to a stronger than expected start of the year.

Sterling rose as Reeves spoke, having fallen initially after the weaker OBR growth forecasts. The pound was up 0.4 per cent against the dollar and 0.3 per cent against the euro. 

One of the surprises in the Budget is a 2 percentage point increase in income tax on dividends, savings and property, according to the OBR.

Kemi Badenoch, leader of the opposition, described the unprecedented OBR “leak” as a “complete shambles”.

The projected fiscal headroom is ￡12bn more than was predicted in March and will reassure investors that the chancellor has a bigger buffer against unexpected shocks.

Lee Hardman, senior currency analyst at MUFG, said the pound was benefiting from an “initial sense of relief there are no nasty surprises” and that a gilt market sell-off had been avoided.

The 10-year yield, which falls as the price rises, was down 0.04 percentage points to 4.45 per cent.

But the OBR warned that fiscal headroom was still “small” compared with the uncertainties around its forecast, and compared with the risks around “an array of complex tax changes”.

The OBR forecast showed that, as expected, Reeves will freeze personal income tax thresholds until 2030-31, in a move that is expected to raise ￡8.3bn by the end of the forecast period.

The income tax personal allowance, the higher-rate threshold and additional-rate threshold are frozen at ￡12,570, ￡50,270 and ￡125,140 respectively, until 2030-31.

“It all looks a bit backloaded,” Francesco Pesole, FX strategist at ING, said of the projected improvement in the government’s fiscal position.

The second-biggest tax measure is a raid on salary sacrifice pension contributions from 2029, which is predicted to raise an additional ￡4.7bn that year.

Among the other measures mentioned by the OBR are charges on electric cars raising ￡1.4bn, gambling duty reform to bring in ￡1.1bn, and a council tax surcharge on homes worth more than ￡2mn, which will raise ￡400mn in 2029-30.

Reeves confirmed a new ￡12,000 annual limit on cash Isas, but also unexpectedly announced that savers over 65 would keep their previous cash allowance of ￡20,000.

The chancellor also confirmed she was scrapping the two-child benefit cap, a move sought by Labour MPs but unpopular with much of the wider public.

UK stocks fell as investors digested the implications of weaker growth. The FTSE 250, the UK’s mid-cap index that reflects the fortunes of the domestic economy, was down 0.3 per cent as Reeves spoke. The large-cap FTSE 100 was down 0.1 per cent, lagging behind other major stock markets on Wednesday.