The budget will increase taxes by £40bn, with the lion’s share coming from a £25bn rise in employers’ national insurance contributions, the chancellor has announced at the budget.
The rise is bigger than predicted but Rachel Reeves added there would be measures to protect small businesses from the change.
Ms Reeves, who said she was “deeply proud” to be the country’s first female chancellor, insisted the Labour government would “invest, invest, invest” and put “more pounds in people’s pockets”.
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The £40bn rise in taxes is thought to be the largest increase at a budget since 1993 and John Major’s government.
An increase in employers’ national insurance contributions to 15% will raise £25bn per year from April 2025, Ms Reeves announced – in what she said had been a “difficult choice” to make.
Businesses previously paid a rate of 13.8% on employees’ earnings above a threshold of £9,100 a year – a threshold the chancellor has now dropped to £5,000.
The chancellor stressed the tax hikes – along with two per cent cuts to spending at all government departments – were needed to fill a £22bn “black hole” in the public finances, which the government says it inherited from the Tories.
The chancellor said a “line-by-line breakdown” of the black hole will be published, which she said shows there were “hundreds of unfunded pressures on the public finances” under the Conservatives.
Some of the major changes the chancellor also announced:
• The freeze on income tax thresholds will end in 2028/29, and will be uprated in line with inflation after that
• Fuel duty will stay frozen next year and 5p cut to remain
• Capital gains tax lower rate will increase from 10% to 18%, higher rate from 20% to 24%
• Residential property capital gains tax will remain at 18% and 24%.
The chancellor started her budget speech by saying the country “voted for change” and “responsible leadership” on 4 July at the general election – and went on to attack the “irresponsibility” of the previous Conservative government.
“We must restore economic stability and turn the page on the last 14 years,” she said.
Ms Reeves added: “The party opposite failed our country. Their austerity broke our National Health Service. The British people have inherited their failure.”
“They called an election to avoid making difficult choices,” she continued.
The chancellor outlined her priorities as economic growth and the NHS, and pledged an end to “short-termism”.
By keeping the triple lock on pensions, the chancellor said 12 million pensioners will gain up to £470 next year.
She also set aside £11.8bn for compensation for victims of the infected blood scandal, and £1.8bn for victims of the Post Office IT scandal.
Rachel Reeves poses with the red budget box in Downing Street before the budget. Pic: Reuters
Ahead of the first Labour budget since Alistair Darling’s in 2010, Labour committed in its election manifesto to not increase income tax, national insurance or VAT on “working people”.
Various ministers got into a tangle over who exactly qualified as a working person in the weeks before the budget.
That was compounded when it was revealed the government was planning to increase employers’ national insurance contributions, as Labour argued it would not be breaking its manifesto promise by doing so.
Pic: Reuters
A few other plans were leaked or announced ahead of the budget, including:
• A change to the fiscal rules – the way in which the government borrows and pays back money – in order to allow for greater investment spending
• An increase to the bus fare cap by 50% to £3
• A boost to the national living wage, with the minimum someone aged 21 and over can be paid increasing by 6.7% to £12.21 an hour
• The national minimum wage, for 16 to 20-year-olds, will also increase – by 16.3% to £10 an hour
• Nearly £3bn in new funding for the Armed Forces.
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