Chancellor Rachel Reeves has announced a £26bn tax-raising budget targeting Britain’s wealthiest households, with measures including a council tax surcharge on properties worth over £2m and a 2p tax increase on dividends, savings and property income. The budget funds the scrapping of the two-child benefit cap and cuts to energy bills, but will push the tax take to an all-time high of 38% of GDP within five years.
Reeves defended the measures, stating she is “asking everyone to make a contribution to repair the public finances”, but wants the wealthiest to pay the most. However, the budget extends a freeze on income tax and national insurance thresholds for another three years, dragging over 1.7 million workers into paying tax for the first time or into higher bands. This “fiscal drag” will raise £12.4bn by 2030-31 and means almost one in four taxpayers will pay higher or additional rates in five years.
The Office for Budget Responsibility (OBR) said the tax squeeze will hit living standards, with real disposable household income rising by just 0.25% a year over the forecast period. Labour MPs privately expressed alarm at the impact on the “squeezed middle”, including nurses, teachers and police officers. Reeves acknowledged the freeze would have a cost for working people but insisted she had not broken the Labour manifesto, which only pledged not to raise rates of income tax, NI and VAT.
Financial markets responded positively, with yields on 10-year government bonds falling to 4.41%, lowering borrowing costs. Labour MPs praised the decision to spend £3bn a year on scrapping the two-child benefit limit, which the government says will lift 450,000 children out of poverty. Reeves also promised to bear down on inflation by removing green subsidies from household energy bills and freezing rail fares, potentially reducing bills by £150 a year from next April.
Some Labour strategists hailed the budget as a shift leftwards, showing “we are a full-blooded Labour government”. But others said the OBR showed the fundamental weakness in the economy remains, and that the budget does little to address deep reservations about Prime Minister Keir Starmer’s leadership. One minister commented: “This buys them a few months.”
