UK (Parliament Politics Magazine) – Chancellor Rachel Reeves announces £26bn Budget with frozen tax thresholds, ISA cap, and two-child benefit scrapped, drawing Tory and union criticism.
As reported by the Guardian, Rachel Reeves confirms income tax thresholds will remain frozen amid £26bn tax hikes and scraps the two-child benefit cap.
The chancellor unveiled in her Budget that pension salary sacrifices above £2,000 will be taxed, and the cash ISA allowance capped at £12,000.
Ms Reeves’ tax increases follow an Office for Budget Responsibility report, mistakenly released early, showing weaker-than-expected economic growth.
What key measures did Rachel Reeves unveil in the 2025 Budget speech?
Rachel Reeves began her Budget speech by condemning the Office for Budget Responsibility for its premature report release.
She defended her budget choices from last year, saying they were fair and necessary. Critics opposed her on planning, trade, investment, and public spending cuts, but she insisted the measures reflected working people’s demands.
Ms Reeves announced that the OBR has raised the 2025 growth forecast from 1% to 1.5%, signaling a more positive economic outlook.
The chancellor highlighted the UK’s low levels of retail investment and said many savers could earn more through stocks and shares. She confirmed the £20,000 ISA allowance will remain, but £8,000 of it will be reserved for stocks-and-shares ISAs.
Ms Reeves said,
“From April 2027, I will reform our Isa system, keeping the full £20,000 allowance while designating £8,000 of it exclusively for investment, with over-65s retaining the full cash allowance. And thanks to our changes to financial advice and guidance, banks will be able to guide savers to better choices for their hard-earned money.”
She added,
“Over 50% of the Isa market – including Hargreaves Lansdown, HSBC, Lloyds, Vanguard and Barclays – have signed up to launch new online hubs to help people invest here in Britain.”
The chancellor announced £4.9bn in efficiency savings by 2031, including cuts achieved by scrapping police and crime commissioners and redirecting the money into frontline services.
Ms Reeves also confirmed inheritance tax exemptions for blood-infection compensation and pledged to release the British Coal pension reserve to former mineworkers.
She confirmed a council tax surcharge, described as a “mansion tax”, for higher-value properties.
Ms Reeves announced a 2-point rise in dividend taxation and reminded MPs that last year’s wealth measures generated £8bn.
The chancellor said electric vehicles will face a new excise duty as part of the government’s revised motoring plans.
Ms Reeves announced a sharp rise in remote gambling duty, lifting the rate from 21% to 40% due to higher harm risks. She confirmed there will be no increase for in-person betting or horse racing. The measure is expected to raise around £1bn by 2033, with no changes to income tax, national insurance, or VAT.
The chancellor confirmed the two-child benefit cap will be scrapped from April, calling it a failed policy. She criticised the “rape clause,” which forced women to provide proof of assault to claim exemptions.
Ms Reeves announced the axing of the ECO insulation programme, citing high costs that outweigh the benefits for many households. She said the move will reduce the average household energy bill by £150.
She claimed the OBR confirmed her Budget would reduce inflation by 0.4% and defended her tax policies as consistent with Labour’s manifesto promises.
What did the OBR say about the UK’s rising tax take by 2031?
The Office for Budget Responsibility has predicted that public sector receipts will rise from 38.9% of GDP in 2024-25 to 42.4% by 2030-31, increasing from £1.1 trillion to £1.5 trillion.
The tax take, measured as National Accounts taxes as a share of GDP, is projected to rise from 34.7% in 2024-25 to a record 38.3% by 2030-31. This represents a 5.4-point jump from the 32.9% recorded before the pandemic in 2019-20.
The OBR has warned that such a high tax take could pose risks to the economy and complicate its own forecasts.
It added,
“A higher level of the tax take increases the risk that incentives within the tax system distort or constrain economic activity by more than expected. The yield from the personal tax threshold freezes, extended in this Budget, is very sensitive to future inflation and nominal earnings growth. If nominal earnings growth was 1.8 percentage points lower than forecast, this would reduce personal tax revenues by 2029-30 by £19 billion.”
What did Kemi Badenoch say about Reeves’s Budget and broken promises?
Tory leader Kemi Badenoch slammed the government for higher borrowing costs than under the previous Tory administration. She added that Rachel Reeves’ own decisions, not outside factors, were to blame and criticised the pre-release of her speech.
Ms Badenoch said the UK has become a “shambolic laughing stock” and argued Reeves should resign over the fallout if not for her policy decisions. She added that all key economic indicators are falling.
She said,
“Today she has announced a new tax raid of £26 billion. They’re all cheering. Household income is down. Spending policies in this Budget increase borrowing in every year. That smorgasbord of misery we have heard from her can be summed up in one sentence. Labour are hiking taxes to pay for welfare. This is a Budget for Benefits Street, paid for by working people.”
The Tory leader continued,
“They can chunter all they like. These are the same backbenchers who cheered last year when she taxed jobs and left more than 100,000 people without an income.”
She told the Commons,
“Last year she put up taxes by £40 billion, the biggest tax rate in British history.“She promised that she wouldn’t be back for more. She swore it was a one-off.”
Ms Badenoch said,
“Today she has done exactly that, why should anyone believe anything she’s promised in this Budget. So where is the money going? Small changes to rail fares and prescriptions. These are distractions while she steals your wallet. The real story here is that Labour has lost control of welfare spending.”
What did unions say about the 2025 Budget and austerity concerns?
Unions slammed the Budget, calling it a continuation of austerity. The Fire Brigades Union highlighted major funding gaps and urged action to tackle the cost-of-living crisis.
Its General Secretary Steve Wright said,
“Firefighters, like all public sector workers, have waited years for a Budget that starts to turn the page on austerity. Although there are steps in the right direction, significant gaps remain that must be addressed if our public services are to be rebuilt.”
Unite general secretary Sharon Graham stated,
“The Chancellor has picked a side. Health workers, engineers, and tanker drivers will pay by stealth taxes, while City bankers and billionaires are unscathed.”
How did Nigel Farage react to the Chancellor’s Budget?
Reform UK leader Nigel Farage labelled the budget as
“Alice-Through-the-Looking-Glass Budget with a healthy dose of socialism and thrown in.”
He said,
“Growth is continually being downgraded. And quite how she and the Prime Minister literally talked recently about cutting debt, and yet, in their first year, they borrowed £21 billion more labour forecast to borrow before they even started.”
Mr Farage added,
“And the parts that I found really difficult to swallow – she talks about supporting entrepreneurs, not understanding that actually entrepreneurial people are generally deciding not to stay in this country, let alone invest in this country.”
The Reform leader criticised Rachel Reeves over ending the two-child benefit, limiting pension salary-sacrifice relief, and introducing a mansion tax.
He added,
“I would very much sum up this budget as an assault on aspiration and an assault on saving.”
What did Shelter say about Rachel Reeves’ Budget and its impact on families?
Homelessness charity Shelter slammed the Chancellor’s Budget, calling it “cold comfort” for families facing housing insecurity, chief executive Sarah Elliott said.
She stated,
“The Chancellor raised the scandal of children in damaging temporary accommodation, but the failure to unfreeze local housing allowance rates will condemn thousands to another grim winter without a secure home.”
Ms Elliott added,
“Even more people will find it impossible to either avoid or escape homelessness in the months ahead unless the government throws them a lifeline. Housing benefit is meant to help struggling families afford a roof over their heads, but it’s too far out of sync with the real cost of renting. For the government’s upcoming homelessness strategy to help children out of temporary accommodation, it must do the right thing and unfreeze local housing allowance.”
How the UK plans to tackle child poverty by scrapping the two-child benefit cap?
The UK government has announced it will scrap the two-child benefit cap, a policy widely recognized as one of the most effective ways to reduce child poverty.
The two-child limit, introduced in 2017, restricted parents from claiming Universal Credit or tax credits for a third or subsequent child. Its removal means that from April 2026, eligible families will receive approximately £3,500 per year for each additional child they were previously denied support for.
Chancellor Rachel Reeve said this change will lift 450,000 children out of poverty by 2029/30. Other organisations, like the Child Poverty Action Group, estimate 350,000 children will be immediately lifted out of poverty, with a further 700,000 moved out of deep poverty.
