Chancellor Rachel Reeves Unveils £40bn Tax Package in Labour’s First Budget
Chancellor Rachel Reeves has announced a substantial £40bn package of tax increases to finance the NHS and public services during Labour’s first Budget in 14 years.
However, she reaffirmed that “working people” would not face increases in income tax, National Insurance, or VAT, maintaining a commitment made by Labour in the recent general election.
Employers will bear the brunt of the tax changes, facing an increase in National Insurance contributions based on their workers’ earnings projected to yield up to £25bn annually for the government.
Conservative leader Rishi Sunak criticized Reeves, accusing her of abandoning her commitments to workers and hampering economic growth, stating, “They’re taxing your job, they’re taxing your business, they’re taxing your savings.”
In response, Reeves argued that any “responsible chancellor” would have made similar decisions to “fix the foundations” of the economy. In a lengthy 76-minute speech, she promised Labour would uphold their election promise to “invest, invest, invest” for economic growth.
Labour has stated that their top priority is achieving the highest growth rate among G7 nations within five years. Nonetheless, the Office for Budget Responsibility has noted that the new economic measures will likely leave GDP relatively unchanged over the same period.
This Budget marks Labour’s largest tax increase since 2010, registering as the second highest tax raise in UK history, slightly below the 1993 Budget by Conservative Chancellor Norman Lamont.
In a surprising decision, Reeves chose not to extend the income tax threshold freeze beyond 2028, which could have otherwise resulted in millions being taxed for the first time or pushed into higher tax brackets.
She has also modified Labour’s self-imposed borrowing regulations, enabling the government to allocate significant funds into the UK’s infrastructure, including urgent fixes for deteriorating schools and hospitals. Additionally, petrol duty will remain frozen for the coming year while retaining a 5p cut that was initially set to expire.
Key Tax Changes Announced
- Increased capital gains tax from up to 20% to up to 24%.
- Extension of the inheritance tax threshold freeze to 2030.
- VAT on private school fees starting January 2025.
- Increase of 50% on Air Passenger Duty for private jet flights.
- New tax of £2.20 per 10ml of vaping liquid introduced from October 2026.
- Tax on tobacco will increase by 2% above inflation, with hand-rolling tobacco rising by 10% above inflation.
- Higher RPI measure of inflation tax for non-draught alcoholic drinks, with a 1.7% cut for draught drinks.
- Stamp duty land tax surcharge for second homes increased by two percentage points to 5% from Thursday.
Reeves emphasized the historic nature of this Budget, stating: “This is a moment of fundamental choice for Britain. I have made my choices. The responsible choices to restore stability to our country. To protect working people. More teachers in our schools. More appointments in our NHS. More homes being built. Fixing the foundations of our economy. Investing in our future. Delivering change. Rebuilding Britain.”
The Office for Budget Responsibility’s forecast indicates an increase in GDP growth expectations for 2024, revising it from 0.8% to 1.1%, while forecasting a slight rise from 1.9% to 2.0% in 2025. However, anticipated growth is set to decline in subsequent years.
Borrowing is predicted to reach £127bn this year, raising concerns among economists regarding long-term fiscal sustainability.
The announcement has been met with mixed reactions. The Liberal Democrats acknowledged the increased NHS funding but voiced concerns about raising employer National Insurance, describing it as a tax on jobs and small businesses, potentially worsening the health and care crisis. Meanwhile, Scotland will receive an additional £3.4bn in Treasury funding as a result of the Budget, as First Minister John Swinney reiterates calls for more fiscal support.
Tore our public services and support our working people.” She highlighted Labour’s commitment to economic stability and public welfare as central to their fiscal strategy.
The Chancellor’s tax package has sparked significant debate, with supporters arguing that the measures are necessary to secure funding for essential services, while critics, particularly from the Conservative party, warn of potential negative impacts on businesses and economic growth.
As Labour prepares to implement these tax changes, the chancellor insists the focus remains on fostering an environment that prioritizes investment and economic resilience, with the hope of positioning the UK for future growth in a challenging global landscape. The full implications of this budget will unfold as various sectors react and adapt to the newly introduced financial landscape.