Chancellor Rachel Reeves has delivered her second Budget, outlining plans for taxes, public services, infrastructure, business support, and social measures, alongside updated forecasts from the Office for Budget Responsibility (OBR). Some details were previously announced, while others emerged after the OBR accidentally published its official forecast early.
This blog aims to summarise what was said in the Budget statement; future City REDI blogs will explore what it means in practice.
Economic and fiscal outlook from the Office of Budget Responsibility
Real GDP is forecast to grow by 1.5 per cent on average in 2025, which is 0.5 percentage points faster than in the March Economic Outlook.
The central forecast for the underlying rate of productivity growth in the medium term was reduced to 1.0 per cent, 0.3 percentage points slower than in our March forecast. The UK’s productivity performance has undershot our forecasts, despite several substantial downgrades since 2010, as a significant rebound from recent negative shocks has not materialised. The further reduction in this forecast is due to a lower forecast for underlying total factor productivity (TFP) growth, which we now forecast at 0.8 per cent rather than 1.1 per cent in the medium term.
Inflation is expected to stay higher for longer than in March due to greater domestically generated inflation and higher food prices. In this forecast, higher food and services prices push CPI inflation up to 3.5 per cent in 2025 and 2.5 per cent in 2026, respectively 0.2 and 0.4 percentage points higher than the March forecast
Personal taxation
National insurance and income tax thresholds announced to be frozen for an extra three years beyond 2028, meaning around a million people who currently don’t earn enough to pay income tax will be drawn into paying it.
That will include people living on the state pension, which is currently just under £12,000 a year but is set to rise. A part-time minimum wage earner, working just 18 hours a week, will also pay income tax, according to the think tank, the Institute for Fiscal Studies (IFS)
The amount of money that can be saved tax-free each year in a cash ISA (Individual Savings Account) will be reduced from £20,000 to £12,000 a year for those under 65.
Basic and higher income tax rates on property, savings and dividend income to increase by 2 percentage points.
Wages, benefits and pensions
The cap limiting households on universal or child tax credit from receiving payments for a third or subsequent child to be scrapped from April.
Wage for 18 to 20-year-olds to go up 8.5%, from £10 to £10.85 per hour, as part of a plan to establish a single rate for all adults.
From April 2027, there will be a two-percentage-point increase to the basic, higher and additional rates of savings income tax, increasing them to 22%, 42% and 47% respectively.
There will also be increases in the rates of tax on dividends and property income.
Housing and property taxes
Properties in England worth more than £2m to face a council tax surcharge of between £2,500-£7,500, following a revaluation of homes in bands F, G and H.
Transport and business taxes
The tax on profits made by gambling firms from online bets will rise from 21% to 40% in April, alongside the abolition of the 10% bingo tax.
The 5p “temporary” cut in fuel duty on petrol and diesel will be extended again until September 2026, after which it will rise over a six-month period.
A new mileage-based tax for electric vehicles and plug-in hybrid cars will be introduced from 2028.
Regulated rail fares in England will be frozen next year — the first freeze since 1996 (although there have been periods when rises were below inflation).
Premium cars will be excluded from the Motability scheme, which allows people on certain disability benefits to lease vehicles at a lower cost.
The tax on sugary drinks will be extended to pre-packaged milkshakes and lattes from 2028, reversing the exemption that was in place when the tax was introduced in 2018.
Other measures
English regional mayors will be given powers to tax overnight stays in hotels and holiday lets, mirroring similar measures already planned in Scotland and Wales
Key Highlights
Economic and Fiscal Outlook
- GDP growth: Expected at 1.5% in 2025, up from the earlier forecast of 1%. Growth then slows slightly: 1.4% in 2026, and 1.5% from 2027–2030.
- Inflation: Predicted to fall by 0.4% next year, with Reeves attributing the decrease to government action on energy bills and prices.
- Deficits and debt: Near-term deficits remain high (£52.4bn in 2025–26, £28.8bn in 2026–27, £4.6bn in 2027–28), before moving into surpluses (£3.9bn in 2028–29, £21.7bn in 2029–30, £24.6bn in 2030–31). Net financial debt is £2.6tn, meaning roughly one in ten pounds of public spending goes on debt interest.
- Fiscal stability: The government expects to meet its stability rule for a balanced current budget, with more headroom than projected earlier.
Taxes and Financial Measures
- Income tax and National Insurance: Thresholds frozen until 2030–31, which will gradually push more people into higher bands. Around a million people who currently do not pay income tax, including some state pensioners and part-time minimum wage workers, will be affected. Experts describe this as a “stealth tax.”
- Salary-sacrifice pensions: Contributions above £2,000 a year will be liable for employer and employee National Insurance from April 2029. The OBR estimates this will raise £4.7bn in 2029–30. Pension experts warn it could discourage saving and increase administrative burdens.
- ISAs: Annual allowance of £20,000 retained, with £8,000 specifically for stocks and shares ISAs.
- Council tax surcharge: Homes in England over £2m will face an annual charge of £2,500, rising to £7,500 for properties over £5m. Expected to raise over £400m by 2031 and affect fewer than 1% of properties.
- Property tax: Permanently lower rates for 750,000 retail, hospitality, and leisure properties, funded by higher rates on properties worth £500,000 or more.
- Gambling tax: Remote Gaming Duty rises from 21% to 40%, online betting duty to 25%, and bingo duty is abolished from April 2026. These reforms are expected to raise more than £1bn per year by 2031.
- Electric vehicle excise duty: 3p per mile for electric cars, 1.5p for plug-in hybrids, funding road maintenance and £200m for charging points.
- Other measures: Higher dividend tax by 2 percentage points; small-package import tax removed from 2029 to support UK businesses.
Families, Education, and Social Support
- Two-child benefit cap: Abolished from April 2026, ending the controversial “rape clause” and aiming to reduce child poverty.
- Apprenticeships: Funding for under-25 apprenticeships will be free for small and medium-sized enterprises.
- Youth Guarantee: £820m over three years to give 18–21-year-olds access to apprenticeships, training, or job support.
- Education funding: £5m for primary school libraries, £18m for playground upgrades across England.
- Health: £300m for neighbourhood health centres in England, integrating GPs, nurses, dentists, and pharmacists, especially in deprived areas. Face-to-face assessments for disability benefits are returning, expected to help around 15,000 people back into work.
Infrastructure, Business, and Energy
- Major projects: Lower Thames Crossing, Northern Powerhouse Rail, investment zones in Wales, including AI projects and small nuclear reactors in Anglesey.
- Business support: UK listings relief – three-year stamp duty exemption for firms listing in Britain; government procurement reformed to encourage domestic supply chains.
- Motability scheme: Luxury cars removed, aiming for half of vehicles leased by 2035 to be British-built.
- Energy support: 5p fuel duty cut extended until 2026; ECO energy insulation scheme scrapped to save households around £150 annually; electricity price support continues.
Wages and Benefits
- State pension: Rise of £440 a year, higher for new state pension recipients.
- National Minimum and Living Wage:
- Over 21: £12.71 (up 4.1%)
- 18–20-year-olds: £10.85 (up 8.5%)
- 16–17-year-olds: £8.00
- The government has accepted the Low Pay Commission’s recommendations in full. The rise ensures a real-terms pay increase, maintains the National Living Wage at two-thirds of median earnings, and moves the 18–20-year-old rate closer to the adult rate.
Summary
The 2025 Budget combines targeted tax increases—including pension, property, and gambling reforms—with spending on public services, infrastructure, and business support. The government aims to maintain fiscal stability and reduce inflation, with analysts noting this is the third-largest tax-raising Budget since 2010, bringing in nearly £30bn of additional revenue, offset in part by £12bn in new spending.
See upcoming City-REDI blogs on what this all means.
This blog was written by Dr Chloe Billing, Research Fellow and Maryna Ramcharan, Senior Policy and Data Analyst, City-REDI.
Disclaimer:
The views expressed in this analysis post are those of the author and not necessarily those of City-REDI or the University of Birmingham.