Rachel Reeves is gearing-up to delivery an historic Budget – not just as she is Britain’s first female Chancellor but in the likely scale of the tax rises on the way in a bid to tackle a funding crisis left by the Tories.
Reports suggests she will announce £40billion in tax rises and spending cuts. Paul Johnson of the Institute for Fiscal Studies predicted it would be “one of the biggest tax raising Budgets ever”. Labour has ruled out raising income tax, VAT and national insurance on employees.
With so many leaks about what’s expected in the Budget, you’d be forgiven for thinking there is little left for the Chancellor to announce. So just what tax rises are expected in the Budget and how might they impact you.
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National Insurance
Of all the expected measures in the Budget, this has been among the most contentious. Just to explain, national insurance contributions – or NICs – are the UK’s second-biggest tax, expected to raise just under £170 billion this financial year. They’re paid by employees and the self-employed on their earnings, and by employers on the their workers’ wages.
Labour ruled out increasing NICs on employees. But an increase in employers’ NICs seems all-but certain in a move that could rake in £20billion on its own. Employers currently pay NICs at 13.8% on wages above £175 a week, or £9,100 a year. Reports say Chancellor Rachel Reeves will up the rate by one or two percentage points, and could also lower the threshold.
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For a company with 10 employees earning, for sake of arguments, £35,000 each, its NICs bill would rise from around £35,700 to almost £41,000 if the rates rose by two percentage points. While Labour denies this would amount to a tax on “working people”, experts say it could indirectly impact by employers holding back on wage rises or even cutting jobs because of the added expense.
Sir Charlie Bean, a Professor of Economics at the London School of Economics and a member of the Budget Responsibility Committee at the Office for Budget Responsibility, warned working people would “bear the burden” of the expected increase. He said: “Real wages will turn out to be lower than they would otherwise be.”
Minimum wage
One big change that has been announced on the eve of the Budget is a hefty jump in the National Living Wage.
The rate will surge by 6.7% next April, from £11.44 to £12.21 an hour. That’s a lot more than was even being speculated earlier this week and, according to the Treasury, will be worth £1,400 a year for the average full-time eligible worker.
And that’s not all as the National Minimum Wage for 18 to 20-year-olds will also rise, from £8.60 to £10.00 an hour – the biggest increase on record. The £1.40 increase will equate to a £2,500 a year boost to full-time younger workers eligible for the rate. The Government says it wants to align the National Minimum Wage and National Living Wage to create a single adult wage rate over time.
The minimum hourly wage for an apprentice will also rise. An 18-year-old apprentice in an industry like construction will see their minimum hourly pay leap by 18%, a pay bump from £6.40 to £7.55 an hour.
Combined with the expected higher employers’ national insurance rate, it will prove a double whammy for firms. However, ministers are likely to say previous warnings over the impact of a higher minimum wage were wide of the mark and that more money in workers’ pockets was ultimately good for the economy.
Income tax thresholds
How much personal tax you pay each year depends on what your income and what tax bracket you fall into. The standard personal allowance – or the amount before you pay tax – is £12,570. The basic rate of 20% is levied on income from £12,571 to £50,270, then a higher rate of 40% on incomes of £50,271 to £125,140, then an additional rate on higher earnings over £125,140 a year.
The Chancellor is expected to extend an existing six-year freeze on these thresholds. Doing so could raise £7billion a year for the Treasury as more people start paying tax – or are dragged into higher bands – as their incomes increase.
According to investment platform Interactive Investor, if the freeze in tax thresholds is extended from 2028 to 2030, a medium earner on £35,000 a year could end up with a £366 higher tax bill, rising to £1,099 for higher-rate taxpayers. This assumes earnings rising by 2%. Myron Jobson, senior personal finance analyst at Interactive Investor, said: “This is the ultimate stealth tax as people might not realize they are paying more simply due to inflation, making it less transparent compared to explicit tax increases.”
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State pension
Under the “triple lock”, the state pension is due to rise by 4.1% next April – in line with average earnings. On that face of it, it looks like the state pension will go by £473 a year – not bad when compared with the uplift for other benefits. But the stark reality is the vast majority of older people won’t get a £473 increase, nor anywhere near.
This applies to the full rate of the new state pension, which is paid to those who reached the state pension age after April 6, 2016. It is currently £221.20 per week, or £11,502.40, and is set to rise to £230.30 a week, or £11,975.60 a year. As the charity Age UK helpfully points out, just 27% of pensioners get the new state pension – equivalent to 3.4 million older people.
Nearly three quarters of pensioners – about 9.3 million people – are on the old state pension, given to those who reached state pension age before April 2016. It is currently £169.50 per week, or £8,814 per year. If all goes up as expected, it will rise to £176.45 a year, or £9,175.40 a year.
Capital gains tax
Like employers’ NICs, Capital Gains Tax is another that looks set to increase. CGT is a tax on the profit when you sell – or dispose of – of an asset that has increased in value. You only have to pay CGT on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The amount for this financial year is £3,000 but has reduced a lot over recent years.
Reports say CGT on the sale of shares and other assets will rise, but not on second homes. Broadly speaking, basic-rate taxpayers are charged 10% on share sale gains, while higher-rate taxpayers must pay 20% in CGT. It is possible the increase will be focused on higher-rate taxpayers, and by “several percentage points”.
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Fuel duty
Speculation is mounting that Ms Reeves use fuel duty to boost the Treasury coffers. Politicians are so wary of angering Britain’s army of drivers that they’ve frozen fuel duty – currently 52.95p per litre – since 2011/12. It’s also a major tax income, with the Office for Budget Responsibilty’s estimating it generated nearly £25billion last year – equivalent to £850 per household. That’s before VAT of 20% is added on top.
The Tories also announced a temporary 5p cut to the fuel duty rate in 2022 as pump prices rocketed following Russia’s invasion of Ukraine. While it’s unclear if the Chancellor will tamper with the main rate of duty, the focus is more on whether she will reverse the 5p cut. The RAC estimates that doing so will increase drivers’ costs of filling up their tanks by an average of £3.30.
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Booze duty
The Chancellor hasn’t ruled out increasing tax on beer, wine and spirits. Alcohol duty is levied on all drinks that are more than 1.2% ABV strength, either at the point of production or when they are imported into the UK.
Drinks firms have been busy lobbying against a rise. Nuno Teles, managing director of Guinness and Smirnoff maker Diageo in the UK, said: “The Chancellor may feel that she has been handed ‘Mission Impossible’; ignite economic growth while managing a so-called Budget blackhole. It’s certainly a challenge, but the spirits industry offers a solution. Working with our industry will not only support business growth but will simultaneously increase Treasury revenue.”