Rachel Reeves’s £40 billion tax bonanza will affect the financial wellbeing of millions of households for years to come.
The impact of the Chancellor’s smash-and-grab raid will be felt by all age groups, from young workers to pensioners. Here’s how last week’s Budget could affect you and your finances.
Young workers
First-time buyers could face paying thousands more in stamp duty after Rachel Reeves lowered key thresholds.
Smash-and-grab: Rachel Reeves’s £40 billion tax bonanza will affect the financial wellbeing of millions of households for years to come
Next April, the threshold at which first-time buyers begin to pay stamp duty will fall from £425,000 to £300,000.
Those renting are also likely to feel the pain. Experts have warned that an increase in stamp duty for those buying a second home could mean there are fewer properties available to rent in future.
This could worsen an existing shortage of homes in the rental market that has led to dramatic surges in rents in recent years – the average rent is up 40 per cent since June 2020, according to rental agency HomeLet.
In the workplace, anyone starting out their careers on minimum wage will receive a 6.7 per cent increase, with the national minimum wage rising to £12.21 an hour from April. The minimum wage for 18 to 20-year-olds will go up by £1.40 per hour.
However, the effect will unfortunately be more than mitigated by the economic impact of the Chancellor’s National Insurance hikes on employers, experts warn. This could translate into fewer jobs, opportunities for promotion and pay rises.
Sarah Coles, head of personal finance at stockbroker Hargreaves Lansdown, says: ‘The impact of higher National Insurance contributions for employers will feed into business finances, and is likely to mean smaller pay rises further down the track.’
She recommends that workers build up an emergency safety net by putting aside some money by direct debit into a savings account every payday. As a rule of thumb, you should set aside between three and six months of your usual wages as a rainy-day fund.
Families
Workers will continue to lose out to an ongoing stealth tax raid on their incomes. Reeves has said that a freeze on the thresholds at which income tax is paid will go ahead as planned until 2028. This means that already stretched household budgets will be squeezed further, due to an effect known as ‘fiscal drag’, which occurs when salaries rise but tax thresholds do not. The taxman therefore gets a larger proportion of your earnings than otherwise would be the case.
As a result of the freeze until 2028, an extra four million workers will be dragged into paying an additional rate of tax (45 per cent), taking the total number past 40 million for the first time, according to official forecasts.
Rachael Griffin, tax and financial planning expert at Quilter, says: ‘By opting to maintain the freeze, the Government has ensured that the tax burden continues to rise for millions, despite their promise to the contrary.’
Rachel Springall, of savings rate scrutineers Moneyfacts, says that one consequence will be that families will find it harder to set aside money for their children. ‘If things are already tight, how can people save?’ she says.
Buried in the Budget was another piece of bad news for families. Reeves has abandoned plans to assess child benefit on household income – instead of the highest earner’s income – as she warned it would cost too much. It means the current system, which penalises single-income families, will remain unchanged.
And those with young children could be left disappointed. Published alongside Reeves’ Budget was the latest forecast from the Office for Budget Responsibility (OBR), which warned that plans to give working parents 30 hours of free childcare a week could come unstuck. It said: ‘There is a risk of a shortfall in the supply of funded places and staff for the September 2025 expansion, which will be the largest one yet.’
Parents with children in private schools will take a hit after the Chancellor ploughed ahead with the plan to levy 20 per cent VAT on fees from January 1. How much this will affect the fees paid by parents will depend on the decision of individual schools.
There are fears that mortgage rates could go up once more following the Chancellor’s £162 billion borrowing binge with the OBR predicting they could rise by almost a percentage point to 4.5 per cent over the next three years.
Pensioners
Pensioners may be forced to rethink their inheritance plans, after the Chancellor slapped a new death duty on pension pots.
Pension pots left to family members will be dragged into the inheritance tax (IHT) net from April 2027. In its first three years, this tax grab is expected to affect 8 per cent of estates. In contrast, only 4 per cent of estates are currently subject to IHT, which is charged at 40 per cent.
Karen Barrett, chief executive of financial advisers Unbiased, said Reeves’s attack on pensions means that the estate planning people have already done needs to be revisited.
She says: ‘If your estate planning is based on the current IHT rules, it’s a good idea to review this and consider making changes with the help of a financial adviser.’
Former pensions minister Baroness Altmann has warned that by making pensions subject to IHT, Reeves could inadvertently increase pensioner poverty by giving retirees ‘an obvious incentive’ to raid their retirement pots, potentially leaving them short later on.
‘People may think why not take all the money you have saved and spend it?’ she said.
In good news, the Chancellor confirmed that the state pension will rise in line with average earnings, going up by 4.1 per cent next April. Anyone who reached state pension age after April 2016 will see their weekly income rise by £9.05 to £230.25 a week – an increase of £472 a year. Older pensioners on the basic state pension will receive an increase of £6.95 to £176.45 a week – a rise of £363 a year compared with now.
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