British chancellor Rachel Reeves hikes taxes by £26bn in budget

Ms Reeves' measures will leave 1.7m people paying more, says UK budget watchdog

British chancellor of the exchequer Rachel Reeves delivering her Budget in the House of Commons. Picture: House of Commons/PA 

British chancellor Rachel Reeves hiked taxes by £26bn (€29.6bn) as she faced forecasts of weaker economic growth, faster inflation, and higher unemployment.

Ms Reeves' measures, including a freeze on income tax thresholds which will leave 1.7m people paying more, take the tax burden to an all-time high according to Britain's Office for Budget Responsibility (OBR).

The tax hikes come in response to downgraded economic forecasts but also increased welfare spending because of the abolition of the two-child benefit cap and the Labour revolt over attempts to curb the benefits bill.

Ms Reeves also used some of the tax take to build herself a bigger buffer against her borrowing rules.

But she also spent some of it on scrapping the two-child limit for universal credit - a measure to ease child poverty warmly welcomed by Labour MPs but costing £3bna year by 2029/30.

Measures to save £150 from the average household energy bill will cost £3bn (€3.4bn) next year and an average £2n (€2.2bn) in the following two years.

In an unprecedented blunder, full details of Ms Reeves's plans were published by the OBR more than half an hour before she stood up in the House of Commons chamber. 

The OBR apologised, blaming a "technical error".

The budget watchdog forecast gross domestic product would grow by 1.5% this year, an increase from its earlier 1% forecast. But it downgraded growth in 2026 from 1.9% to 1.4%, in 2027 from 1.8% to 1.5%, in 2028 from 1.7% to 1.5% and in 2029 from 1.8% to 1.5%.

The OBR said the Budget "raises taxes by amounts rising to £26bn in 2029/30, through freezing personal tax thresholds and a host of smaller measures".

The freeze in thresholds will result in 780,000 more basic-rate, 920,000 more higher-rate, and 4,000 more additional-rate income tax payers in 2029/30 as earnings rise over time. Scotland has a separate income tax system.

People are dragged into paying 20% income tax if their earnings rise above £12,570 (€14,347), with the 40% rate from £50,271 (€57,378) and the 45% band from £125,140 (€142,800).

The freeze in income tax and national insurance contributions, which will extend until 2030/31, will rake in £8.3bn for the Exchequer in 2029/30.

Ms Reeves acknowledged the freeze in tax thresholds would hit "working people" - the group Labour had promised to protect - but she was "asking everyone to make a contribution".

She confirmed a new mansion tax, a "high value council tax surcharge", of £2,500 for properties in England worth more than £2m, rising to £7,500 for those worth more than £5m. 

Bank of Ireland chief economist Conall Mac Coille said the UK budget put off difficult tax increases until late-on in the life of the parliament. 

"The big picture is that today's Budget was not the sharp, painful, up-front fiscal adjustment that might have substantially changed market expectations for Bank of England rate cuts or helped to stimulate demand for long-dated UK gilts. Far from it, instead borrowing will be higher in 2026, 2027 and 2028," said Mr Mac Coille.