What the Autumn Budget means for the UK economy

Rachel Reeves managed to walk a thin line in her second budget. Raising £26.1bn in taxes, more than doubling her headroom to £21.7bn, without breaching the manifesto or spooking financial markets, and with the net impact on the economy over the next year looking minimal was no easy feat. However, relying on large tax rises in the future and a smorgasbord of smaller, complex taxes raises the chances that future economic growth is slower and that more taxes will eventually be needed.

While the headline increase in taxes of £26.1bn is a substantial rise, almost all of this is back-loaded to the end of the parliament. That will take the tax-take as a share of GDP to a record 38% by 2029/30. However, the increase in taxes next year is just £0.7bn, focused on higher charges on savers, investors and small businesses.

On the other side of the ledger, increases in benefit spending and efforts to cut energy and transport bills mean that the Budget gives a very small boost to the economy next year and will temporarily bring down inflation.

Overall, the tax increases in today’s Budget are largely to pay for increased spending and increasing the fiscal headroom, rather than worse economic forecasts. That will blunt some of the negative economic impact, especially in the short term, and if a bigger fiscal headroom boosts confidence.

Effectively kicking the can of tax increases down the road could, at best, be a drag on growth in years to come. At worst, it could result in another big tax-raising budget next year.

The ‘Uncertainty Budget’ that became certain too soon

Following one of the longest pre-budget run-ups of recent times, the Chancellor finally stood at the despatch box to share her plans for the economy.

The dropping of the rumoured income tax rise further fuelled speculation as to how the Chancellor could balance the books sufficiently to prevent a re-run in 2026. We anticipated a smorgasbord approach of lots of small changes and that is what we’ve got.

The big revenue raisers will be:

• The freezing of income tax and national insurance contributions (NIC) thresholds for three, rather than the expected two, years to 2031.
• A cap on the benefits for both employees and employers of using salary sacrifice to boost pension contributions for both employees and employers.
• A ‘mansion tax’, which will take the form of a council tax surcharge on properties worth over £2m.

Key Autumn Budget 2025 announcements

Ahead of Budget day, the Government announced an increase to the national minimum wage (NMW) from 1 April 2026. Workers over 21 will see their hourly rate increase by just over 4% to £12.71.

18–21 year-olds will see NMW rise by 8.5% (reflecting the Government’s intention to phase out this band). Apprentices and under 18s will receive a 6% pay rise.

These increases are good news for those currently in work, but potentially increase the barrier for those seeking to enter the job market. These changes will also impact those industries already hard-hit by last year’s increases, rising costs and the earlier increase in employers’ NICs.

Pensions reform has been mooted ahead of fiscal events for the past ten years, but with little materialising. Last year the Chancellor made changes to the inheritance tax (IHT) treatment of pensions for many. This year she has gone a step further and capped the amount of salary which can be sacrificed for pension contributions without incurring either employee or employer NICs. From April 2029 only £2k of salary can be sacrificed for pension contributions without incurring NICs. Any amount above this will incur employee NICs at 2% and employers' NICs at 15%.

Having backed away from the anticipated rise in income tax rates, the Chancellor chose to extend the freeze on income tax and NIC thresholds. By 2031 the personal tax bands will have been frozen for 10 years. With inflation stubbornly remaining above the Government's 2% target and wages rising, more people inevitably will be dragged into each of the income tax bands.

Investors will be disappointed that the Chancellor increase the rate of tax they pay on dividends. This is a further blow to investors holding shares outside of pensions and ISAs after the previous government cut the amount of dividends an individual can receive tax free from £1k to £500 from April 2024.

The rates will increase by 2%, moving the basic rate and higher rates of income tax on dividends to 10.75% and 35.75%, respectively.

Many business owners will also see the tax they pay on money they take out of the business increase because they remunerate themselves by a mix of dividends and salary.

The rates of income tax applicable to savings income and property income have also been increased.

For savers and landlords, the rates will increase to 22% for basic rate taxpayers and 42% and 47% for higher and additional rate taxpayers. Deduction for mortgage interest will also rise to 22% in line with the property income basic rate.

Having explicitly stated that they would not increase the rates of income tax in their 2024 manifesto, this is a clear breach of that pledge. However, in recent months, the Government has made it clear that their priority is to protect the tax paid by "working people", not investors.

Savers will also be disappointed by the Chancellor’s decision to cut the amount they can invest into a cash ISA each year from £20k to £12k (with the remaining £8k remaining available for stocks and shares ISAs). By cutting this limit, the Chancellor is aiming to encourage investment in stocks and shares with the hope of boosting economic growth.. The £20k cash ISA limit will remain for the over 65s.

Whilst many possible changes to capital gains tax (CGT) had been floated in recent months, the only one mentioned in the Chancellor’s speech was CGT relief on disposals to EOT's which will be reduced from 100% to 50%.

One of the areas subject to the most speculation has been changes to property taxation for homeowners, buyers and sellers. Today the Chancellor confirmed that a mansion tax will be introduced in the form of a council tax surcharge on properties worth over £2m.

From April 2028, there will be four price bands with surcharges ranging from £2.5k for properties valued between £2m and £2.5m, to £7.5k for the highest band, valued at £5m or more. The rates will be updated anually in line with inflation.

While the Government expects this to raise in the region of £400m, the impact is intended to affect those considered to have the broadest shoulders. However, the impact on the asset-rich, cash-poor, such as pensioners, remains to be seen.

Several changes to gambling duties were also announced, including an increase in remote gaming duty from 21% to 40% and the introduction of a general betting duty of 25% for remote betting. Overall, the OBR forecasts that this will increase gambling duties by £1.1bn per year (by 2029–30).

Predictions of a very significant increase in gambling duties have therefore come true. Gambling companies will have to assess how much of the increases will be passed on to customers in the form of reduced payouts. As expected, the Chancellor linked these tax raises to her ability to remove the two-child benefit cap.

Ahead of the Budget, the Health Secretary announced that the level above which the sugar tax is applied to drinks will be reduced from 5g to 4.5g per 100ml. The levy will also be extended to previously exempted milk drinks, bringing some pre-packaged milkshake and coffee-based drinks into scope.

The Chancellor was widely expected to cut VAT on domestic energy bills from 5% to 0% to reduce the cost of living and positively impact household inflation. However no announcement was made.

UK retailers will be pleased that the Chancellor is removing the customs duty relief that applies to small packages worth less than £135, entering the UK. This change will allow UK retailers to compete on a level playing field with overseas suppliers selling into the UK. This will not be universally popular as it will increase costs for the consumer.

The changes to the capital allowances regime will have come as a surprise to UK businesses. The Chancellor announced that, while maintaining full expensing, she was also introducing a new 40% first year allowance. Main pool writing down allowances will reduce from 18% to 14% per annum.

Given full expensing is typically available for new additions, the benefit will be limited for most businesses. However, the leasing industry will see an impact as full expensing is not available for business which lease out their assets.

The Chancellor has taken the opportunity to extend the 5p cut to fuel duty by six months to September 2026. From April 2027, for the first time in 15 years, fuel duty will increase in line with inflation.

As expected, a pay-per-mile charge will be introduced for electric vehicles. The new charge will come in from April 2028 at a rate of 3p per mile, reduced to 1.5p per mile for plug-in hybrid cars. The rate will increase annually in line with the Consumer Prices Index. Unless there is an exemption for commercial vehicles, this charge will also increase costs for the many businesses making the move to electric vehicles.

A set of incentives to encourage the purchasing of electric vehicles was announced alongside this tax.