Rachel Reeves’s Budget was clever, complicated, and will leave all of us collectively £26.6bn worse off by 2030/31.
Though the headline measures were all announced, it may not immediately be clear how they affect you.
So here’s what they really meant, which Rachel Reeves will no doubt hope you haven’t noticed.
The ‘big freeze’ on income tax thresholds will now last a decade
It was a winter Budget. Not just because we are already waking up to ice on cars and pavements, but because Reeves has extended the freeze in tax allowances for another three years beyond the April 2028 end set by her Tory predecessor.
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The big freeze – already costing us £40bn this year in extra income tax – will now last for a decade overall, as tax thresholds have been frozen from where they were in 2021 until 2031.
What this means in practice is that for three more years when pay, pensions and taxable benefits rise, every extra pound we get, Reeves will take back 20p, 40p or 45p in tax – plus for many workers another 8p in NI.
By the time it ends in 2031/32 a decade of frozen tax allowances will have left us well over £50bn a year poorer and made it even harder for any future Chancellor to thaw HMRC’s icy grip on our money.
Imagine you were earning £35,000 in 2021. If your salary rises by 4 per cent a year, then by 2031 you will be a higher rate tax payer earning around £51,000 – with the income tax you earn on your next pound being charged at 40 per cent rather than 20 per cent.
The freeze will of course hit pensioners hard. The state pension will rise by 4.8 per cent from April making the standard new state pension of £241.30 a week just £22.40 a year below the personal tax allowance of £12,570.
As it rises the extra tax is taken not from the state pension, which is paid gross, but from your other income.
First time in decades there are higher rates on savings and rental income
The big freeze is not the only way HMRC will be snaffling more of our money. Reeves has introduced higher taxes on what you might call unearned income.
For the first time for at least 40 years there will be higher rates of tax on savings and rental income from April 2027.
From this coming April tax, income tax on dividends will rise by 2 percentage points to 10.75 per cent – for someone on the basic rate and to 35.75 per cent for higher rate taxpayers.
What does it mean in practical terms? Someone with £5,000 of dividend income which is not in an ISA will pay £90 more income tax in 2026/27.
The rise in dividend tax rates from April will be matched a year later for people with income from savings.
If you have £3,000 taxable savings income which is not in an ISA that will mean an extra £60 a year in tax. The same higher tax rates will apply to rental income.
Extra council tax – which you will have to pay if you rent your home out
Your home may be your castle but if it is worth more than £2m the Chancellor will send in council tax officers across the drawbridge once a year to collect an annual tax called High Value Council Tax Surcharge.
It will be £2,500 on £2m homes and rise to £7,500 on homes worth £5m or more.
Crucially however, it will be paid by the owner – even if the home is rented out. This is not the case with council tax, which is paid by the occupant.
If you have a valuable home but no other resources to pay the annual charge HMRC will lay siege to your castle until you sell up or die and take it then.
Fuel duty freeze is actually ending – even though it was extended
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The Chancellor announced that a freeze on fuel duty – that has lasted over 15 years – will be extended to April 2026 – but in reality she was announcing the end of the freeze, and the extra 5p a litre discount which began in 2022 under the Conservatives.
That will be phased out between September next year and March 2027 and then from April 2027, the duty will start rising again in line with the Retail Prices Index – which is a measure of inflation that is typically fairly high when compared to some other measures.
That could mean a further increase in fuel duty from April 2027 of 2p a litre.
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