Budget 2025: What Chancellor Rachel Reeves' Announcement Means for Your Wallet
Chancellor Rachel Reeves has delivered a landmark Budget with £26 million worth of tax increases that will impact millions of workers across the United Kingdom. In her House of Commons address, the Chancellor emphasised that while everyone would contribute to the nation's finances, she aimed to keep individual burdens as light as possible while ensuring the wealthiest pay their fair share.
The Budget measures, which were accidentally leaked by the Office for Budget Responsibility before the official announcement, include significant reforms affecting savings, pensions, and benefits. The controversial two-child benefit cap will be scrapped, while tax thresholds face an extended freeze that will drag more workers into higher tax brackets.
Tax Changes: The Stealth Tax Impact
One of the most significant announcements involves extending the freeze on tax thresholds for an additional three years. This means the income tax personal allowance will remain at £12,570 until April 2031, rather than the previously planned April 2028. Similarly, the thresholds for higher and additional rate taxpayers will stay fixed at £50,270 and £125,140 respectively.
This policy of fiscal drag represents a stealth tax increase, as millions of workers will find themselves paying more tax as their wages rise over time, even though the actual tax rates remain unchanged. Basic rate taxpayers continue to pay 20% on earnings above £12,570, with higher rate taxpayers paying 40% above £50,270 and additional rate taxpayers paying 45% above £125,140.
Wage Increases and Minimum Wage Boost
There's positive news for low-income workers, with minimum wage rates set to increase from April next year. Workers aged 21 and over will see their hourly rate rise by 4.1% to £12.71, while 18 to 20-year-olds receive an 8.5% increase to £10.85 per hour. Younger workers aged 16-17 and those on apprenticeships will benefit from a 6% rise to £8 per hour.
The Government estimates these increases will benefit approximately 2.7 million workers across different age groups, providing some relief during the ongoing cost of living challenges.
Savings and ISA Reforms
Savers face significant changes, with the Chancellor confirming that the cash ISA allowance will be reduced from £20,000 to £12,000 from April 2027. This change will only affect individuals under 65, and the overall ISA limit remains at £20,000, meaning savers could potentially allocate £12,000 to cash ISAs and £8,000 to stocks and shares ISAs.
Additionally, the tax rates on savings interest for non-ISA accounts will increase from April 2027:
- Basic rate taxpayers: 20% rises to 22% on savings interest above £1,000 allowance
- Higher rate taxpayers: 40% increases to 42% on interest above £500 allowance
- Additional rate taxpayers: 45% jumps to 47% with no tax-free allowance
Pension Changes and State Pension Increase
The state pension will increase by 4.8% from next April under the triple lock mechanism. This means the full new state pension rises from £230.25 to £241.30 per week - an annual increase of nearly £575. However, many pensioners are moving closer to paying tax on their state pension income for the first time, as the new full state pension amount approaches the £12,570 personal allowance threshold.
The Chancellor announced that people receiving only the basic or new state pension won't have to pay small amounts of tax through Simple Assessment, though details remain unclear. More significantly, salary sacrifice pension schemes will face a new £2,000 yearly cap from April 2029, meaning contributions above this threshold will no longer be exempt from National Insurance.
Benefit Reforms and Two-Child Cap Scrapped
In a major policy shift, the two-child benefit cap will be abolished from April 2026. This controversial policy had prevented low-income families from claiming additional means-tested benefits when they had a third or subsequent child born after April 6, 2017. Department for Work and Pensions figures show this change will affect approximately 1,665,540 children currently impacted by the cap.
Universal Credit payments will also see above-inflation increases next April, with the standard allowance rising from £92 to £98 weekly for single persons aged 25 and over, and from £145 to £154 for couples. The Motability scheme will be reformed to exclude luxury vehicles.
Cost of Living Measures and Energy Bill Relief
Households will welcome the announcement that average energy bills will be cut by £150 from next year through the scrapping of the Energy Company Obligation scheme. Other cost-saving measures include freezing NHS prescription charges at £9.90 next year and maintaining rail fare freezes until 2027.
However, homeowners in expensive properties will face higher costs, with a new council tax surcharge applying to properties valued at £2 million or more in England from April 2028.
Transport and Motoring Changes
Drivers receive mixed news, with the 5p per litre fuel duty cut extended until August 2026, after which rates will gradually return to March 2022 levels by March 2027. Electric vehicle owners will face new costs from April 2028, with battery electric cars subject to a 3p per mile tax and plug-in hybrids charged 1.5p per mile. The Treasury estimates the average EV driver will pay approximately £240 annually.
Smokers, Drinkers and First-Time Buyers
Tobacco duty increases by RPI inflation plus two percentage points effective immediately, while alcohol duty will rise in line with RPI inflation from February next year. The government will consult on reforming the Lifetime ISA and potentially replacing it with a new product for first-time buyers, addressing concerns about withdrawal penalties and the £450,000 property price threshold that consumer champion Martin Lewis has highlighted.
This comprehensive Budget represents significant changes to the financial landscape for British households, with measures designed to balance fiscal responsibility against ongoing cost of living pressures.
