It is the Labour Party and Rachel Reeves’ first budget in power and the media hype has been frenzied.

Leaving so long between announcing the date and delivering the budget may have been a mistake by the new Chancellor. It has fuelled weeks of speculation about what might change, allowing the media to take control of the narrative.

It comes as something of a relief that the budget itself, rather than the rumours, is now here. It could be argued that the trailing of huge tax rises in the press softened the country up for much smaller tax increases, but polls show that public sentiment has dipped since Labour took power and the gloomy picture Starmer and Reeves painted about the economy has damaged their popularity.

Capital Gains Tax (CGT) was rumoured at one point as increasing to 39%, so the news that it was increasing to a more palatable 24%, in line with existing CGT for second homeowners and still lower than the maximum 28% introduced by George Osborne’s tiered system in 2010, will bring an emotional response akin to a tax cut for some. It is far from radical and unlikely to bring in much tax.

Employer National Insurance is to be the main driver of additional tax revenues. Having promised not to change national insurance for ‘working people’ prior to the election, the Chancellor put herself into a difficult position. The increase of 1% to employers National Insurance simply reverses Jeremy Hunt’s reduction to employees National Insurance. Labour tied themselves in knots trying to explain what a tax on working people was to avoid taking the simple, but politically more difficult option, to reverse the previous Chancellor’s tax cut to NI. This will frustrate small business owners, as they will be the hardest hit. Opposing MPs will point out that National Insurance is a tax only levied on working people, and the consequences will be felt by them regardless of how it is paid.

Fiscal drag remains a significant problem, but the Chancellor defied predictions by refusing to extend the freeze on personal allowances further. Income tax thresholds remain frozen to April 2028, but will be uprated from the 2028-29 tax year in line with inflation. Freezing allowances is a tax increase in real terms without increasing tax rates, and a trick every Chancellor has used since Rishi Sunak first used it in 2021. It will be good news, albeit some time off, if Reeves’ sticks to this promise.

The Chancellor made one significant change before the budget which is designed to attract investment and growth in the economy. She has anchored her political career to investment and economic growth but cannot afford to trigger the market turmoil Kwarteng and Truss created with their promise of explosive economic growth coupled with tax cuts. Reeves is keen to show that she intends to cover expenditure with tax receipts, not just more borrowing. Changing the specific definition of debt used for the fiscal rules within which she must operate has freed up £50bn in financial headroom, which she needs some of to invest in public infrastructure. This, she hopes, will be matched with further private investment. She does not want to spend all £50bn.

This is a considerable gamble. A big commitment to investment in the next three years is not followed up with similar levels of spending planned into the final two years of this government’s five-year term. If growth does not come, will the government need to come back to us for further tax hikes, and row back on their commitments such as increasing the personal allowance?

There are some changes which will have a significant impact on many people, including our clients. From what we have seen so far there will be some complexity for us to explore relating to Inheritance Tax (IHT). A consultation will be kicked off which could well bring pensions under IHT by 2027. This will be a concern for both you and us and we intend to provide further information on this subject once we have more we can share with you.

In the meantime we summarise the key headlines below.

Taxes

• Income tax rates will not change and the annual allowance will remain frozen at £12570 to 2028, but there is now a plan to increase this in line with inflation after that date.
• CGT will rise from 10% to 18% for the lower rate and 20% to 24% for the higher rate. CGT on residential properties will be unchanged at 18% and 24%.
• IHT threshold is frozen to 2030, however the Chancellor also stated she would bring inherited pensions into IHT from April 2027, and reform Agricultural Property Relief and Business Property Relief.
• VAT to be applied to private school fees.
• Business Asset Disposal Relief lifetime limit will stay at £1m but will increase to 14% in April 2025 and 18% from 2026-27.
• Non-domicile tax regime to be abolished. Stamp Duty surcharge for non-UK residents increased from 2% to 3%.
• Stamp duty on second homes to be increased from 2-5% with immediate effect.
• Air passenger duty increasing by no more than £2 for economy short haul flights, but a 50% increase for private jets.

Pensions and savings

• Inherited pensions planned to come into the IHT regime by 2027. There will be more detail on this to follow.
• No changes to core investment allowances into ISAs or pensions.
• Agricultural property relief and business property relief reforms to be kept but reduced.
• Enterprise Investment Schemes and Seed Enterprise Investment Schemes will continue until at least 2035.
• Pensions triple lock will be maintained and the state pension will rise by 4.1% from April 2025.
• Relief on shareholdings on the Alternative Investment Market cut to 50%.

Living costs

• Fuel duty cut kept for another year.
• Carers allowance to rise.
• Alcohol duty cut on draught alcohol to help pubs. Rates on non-draught products will increase in line with RPI from February 2025.
• A flat rate duty on all vaping liquid will come into force from October 2026.
• Soft Drinks Industry Levy will rise with inflation, and increase in line with CPI each year going forward.

Businesses

• Employer National Insurance to be increased by 1.2% from 13.8% to 15% with the threshold lowered from £9,100 to £5000 from April.
• The Employment Allowance will increase from £5,000 to £10,500, which the Chancellor claims will mean 865,000 employers won’t pay any National Insurance at all next year.
• Corporation tax capped at 25%.
• The minimum wage will increase by 6.7% to £12.21 an hour from April. For 16–18 year-olds it will increase by 16% from £8.60 to £10 an hour. Apprentices will also an increase of 18%, from £6.40 to £7.55 an hour.
• There will be a crackdown on umbrella companies and promoters of tax avoidance schemes.
• Existing 40% business rates for the retail, hospitality and leisure industries will continue in 2025/26 up to a cap of £110,000 per business.
  Windfall tax on the profits of energy firms extended until 2030 and increased to 38%.

Economy

• The Office for Budget Responsibility (OBR) expects the budget to push inflation up slightly in 2025 to around 2.6% before falling back in line with the Bank of England’s 2% target. This could have a short term impact on interest rates, which may drop more gradually as a result.
• UK economy predicted to grow by 1.1% in 2024, 2.0% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028, and 1.6% in 2029. This is higher than predicted after the April budget for 2024 and 2025 but lower for the following three years. The figures for April were 0.8% in 2024 and 1.9% in 2025. This will be followed by growth of 2% in 2026, 1.8% in 2027 and 1.7% in 2028.

Reeves has leant heavily on the OBR for credibility. Her justification for this downgrading of the medium-term forecasts for growth is that the OBR had been misled in their April analysis by inaccurate information from the Conservative government. She quoted the OBR’s review of the last budget process which concluded that the government “did not provide the OBR with all the information available to them” and if they had that would have led to a “materially different” forecast. This was refuted by Rishi Sunak in his response on behalf of a visibly agitated Jeremy Hunt.

Over the coming days, we’ll be taking a close look at what the Chancellor has announced and what it means for you.

We’ll share our conclusions with you in a detailed report, so keep an eye on your inbox.