UK Treasury chief Rachel Reeves unveils £40bn tax hikes in budget

British Finance Minister Rachel Reeves has unveiled her budget plans in a speech on Wednesday and announced that taxes will be raised by £40bn.

In the Labour Party’s first Autumn Statement in 14 years, Reeves also said National Insurance contributions for employers will increase by 1.2% to 15% from April 2025, which she noted will raise £25bn a year for the government.

The Chancellor further noted there will be an increase in Capital Gains Tax, a freeze on fuel duty in 2025 – and said there will be an introduction of VAT on private school fees.

Reeves also said that defined contribution pension pots will be subject to inheritance tax liability at the death of the holder from April 2027.   

Experts react to UK budget plans

Gary Smith, financial planning partner and retirement specialist at wealth management firm Evelyn Partners, sent Euronews his comments on the plans – and noted what it means for pensions.

“Pensions have been one of the most tax-efficient investments available to savers, with tax relief on personal contributions, tax-free growth and pension funds remaining outside of your estate for IHT on death. That means some retirees have prioritised using other savings and assets to fund retirement before their pensions. 

“More detail are to follow, but the Chancellor has removed the IHT-free status of defined contribution pensions from April 2027, which will mean that the proportion of estates subject to IHT will grow from the current 6%.”

Smith also explained that retirees and savers have 18 months to review their long-term plans. As defined contribution pension funds could now be subject to up to 40% IHT on death, he said we will probably see greater withdrawals from pension pots. 

“Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40%.  

“It’s arguable that this consolidates the two tiers of the UK pension system, as the change removes one of the few advantages that defined contribution pensions had over the gold-plated final salary schemes that now exist largely just in the public sector. DC pot holders could leave their savings to beneficiaries tax-efficiently, while the death benefits for members of public sector or defined benefit pension arrangements vary between schemes, but usually entail an income paid to dependents,” he added.   

Smith also said there seems to be a willingness in Whitehall to allow the gap between private and public sector pension arrangements to widen.

How the budget will hit property, mortgage and lending markets

Paresh Raja, CEO of Market Financial Solutions, shared his thoughts with Euronews on how the announcement will impact the property, mortgage, and lending markets.

“The Government had warned of tax rises to fill the black hole in public finances, so there was apprehension across the property and finance sectors heading into today’s budget. Unlike previous budgets – think Kwarteng’s mini-budget – Reeves opted for a more measured approach, refraining from pulling any proverbial rabbits out of the hat – although the increase to Stamp Duty surcharge on second homes was unexpected. This approach should calm the lending and property markets, easing some of the uncertainty that has lingered in the lead-up to this announcement.

“In general, the clarity offered today is certainly welcome, though we’ll need to see how these policies translate practically. While certain regulatory and tax reforms may require careful consideration from investors and brokers alike, I anticipate the market will soon shift back to ‘business as usual’ – particularly as some of the tax increases were less substantial than many were expecting. This is promising, as the property sector has shown great resilience in recent months amid an improving economic outlook. Today’s steady fiscal approach should help maintain that positive momentum, provided that investors are able to navigate the more unexpected changes that have been made with confidence.

“Indeed, some of today’s announcements – such as the rise in Capital Gains Tax (CGT) and the Stamp Duty surcharge on second homes – will undoubtedly put a slight dampener on investors’ moods. As such, it’s up to lenders and brokers to work together to provide financial products that can help them navigate the evolving market conditions with confidence in the months ahead. The property investment landscape may have shifted, but through collaboration and innovation, there’s no reason why it can’t continue to thrive in the aftermath of today’s announcements,” he added.

Reaction to tax reforms, including CGT and non-dom

Raja further noted hiking Capital Gains Tax (CGT), increasing Stamp Duty on second homes and abolishing the non-dom status will pose significant questions for domestic and international investors across the UK property market.

“Make no mistake, these will feel like a gut punch to many investors. But just as with mortgage rate relief, stamp duty surcharge and regulation in the private rental sector over the past decade – the appeal of investing bricks and mortar should continue to shine through. That said, there’s no doubt that lenders must help brokers and borrowers in understanding the changes that have been made. Education will be key, and those brokers and lenders that can provide it will be of the most value in the weeks to come.”

Christie Cook, head of Retail atHodge Bank, told Euronews in an email note: “As CGT will now increase, this will mean that investing in UK businesses will become far less attractive to people. The previous rates were 24% on property and 20% on businesses. However, the Autumn Budget has now announced that CGT on businesses will be going up to 24%, with the CGT on residential property remaining the same.

“This will have a huge impact on entrepreneurs and start-ups. While SMEs are typically the backbone of the UK economy, they may be more apprehensive setting up a business, now they need to take into account the higher CGT they’ll have to pay.

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“As far as investments go, people will likely feel a lot more comfortable investing their money in British banks with high savings that have a guaranteed interest income, rather than investing in the UK stock market where they have higher outgoings now due to the recent announcement.”

Gareth Morgan, the CEO of Balance, said: “Our government needs to recognise that small businesses like ours are the backbone of this country, employing a huge amount of the country’s workforce. We should be encouraging more people to set up businesses in the UK but it’s already quite an unattractive proposition and one that cannot get any worse.

“With the announcement of minimum wage going up to £12.21 for over 21s, and £10 for those between 18-20, and National Insurance going up for employers now to 15%, and the threshold being reduced to £5,000, it means that it’ll be more expensive for any business to run. I know people who’ll be less likely to employ based on this and this will certainly be factored into our growth plans based on head count.

“For the first time, I am worried about the future of the British economy. I know a number of people in the past couple of years who’ve moved to countries such as Dubai, and others that are threatening the same. These people contributed a lot towards the British economy, and now that money is helping other countries. I’ve always thought of Great Britain as a great place to set up a business but I fear that I am no longer in the majority.

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“As a small business, we were concerned that taxes were going to be going up. Over the past few years, we’ve seen entrepreneurs’ relief fall by 90%, corporation tax grow by over 30% and dividend allowance drop hugely. Now, we also have an increase in employer’s NI and increased minimum wages to pay, so the cost to run a business is substantially more.”

The government’s commitment to house building

The government’s commitment to house building should stimulate activity across all segments of the housing market, creating a wide range of opportunities for buyers and investors, Paresh Raja noted.

However, he said that people can be forgiven for listening to today’s budget pledges with a degree of scepticism – “almost every budget includes promises to build more homes, but the devil is always in the detail,” he noted. 

“Reforming the planning system is clearly key, so the government’s focus on this area is welcome, with the rumoured additional planning officers being confirmed by the Chancellor today. It not only needs to be easier for new developments to get the green light, but also for investors and property owners to do more with existing real estate – conversions, renovations and extensions can do a lot to boost the national housing stock.

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“It’s equally important that the Government ensures new homes are delivered where demand is highest. If the location, type and quality of property is not high enough, there will be a struggle to attract buyers and renters, so there has to be a sharp focus on building the right properties in the right places.”

Market reaction to UK budget plans

Sterling has pared this morning’s losses against the dollar and fell only modestly against the euro, as the UK budget announcement keeps the British economic outlook intact.

That’s according to FX market analyst Kyle Chapman at Ballinger Group, who also said that Reeves has successfully avoided a crisis.

“There has been little reaction from the announcement itself, and the majority of the 0.35% drop in GBP/EUR all played out this morning. The major details were all leaked in advance, the OBR has retained its medium-term growth forecasts, and the impact of the capital spending plans are likely to materialise only in the longer term. That makes it a non-event for sterling, and markets can switch back to focusing on monetary policy.

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“The tax increase is a touch higher than most were expecting and there is bound to be some backlash from businesses about the employer’s NI increase, but the OBR appears confident that the tax rises will not derail a strong increase in growth momentum next year. However, it is worth noting that their forecasts are far more optimistic than most.”