Key Takeaways From UK Budget 2025: Starmer Govt Rolls Out Big Tax Hikes, Ends Two-Child Benefit Cap

The UK’s Labour government led by Prime Minister Keir Starmer on Wednesday unveiled a tax-raising budget worth billions of pounds to rein in public debt and pump fresh funds into struggling services.

Finance

Minister Rachel Reeves attempted to strike a careful balance in a bid restoring Labour’s economic credibility at a time when the party is lagging in opinion polls, while also reassuring markets that the government remains fiscally disciplined as the country faces lower economic growth in the coming years.

Reeves faced some criticism from the Conservatives for taking a U-turn on her pledge to uprate thresholds in line with inflation.

She announced billions of pounds worth of tax rises through to 2030-31, or one year after the next general election is due.

The tax hikes will raise nearly £30 billion ($40 billion) in 2030-31 and £26 billion in the previous fiscal year, official figures showed.

It brings “tax take to an all-time high of 38 per cent of GDP in 2030-31,” Britain’s budget watchdog said in its report.

The bulk of the extra funds will come from a freeze on income-tax thresholds beyond 2028 to 2031, pushing more workers into higher brackets.

Gambling, Homes Face Higher Taxes, Banks Spared

The budget also included higher levies on gambling and homes worth more than £2 million, along with a mileage-based charge on electric cars.

Local mayors were given powers to levy a ‘tourist tax’ on visitors, while tax benefits for employee contributions to private pensions were capped.

Banks, long considered a potential target, were spared from tax increases.

Push To Address Cost Of Living Crisis

Reeves announced that the two-child benefit cap will be scrapped from April 2026. The cap currently restricts families from claiming benefits for a third child or any child born after 6 April 2017.

Ending the limit is expected to lift nearly 4.5 lakh children out of poverty, according to the government’s estimates.

The Office for Budget Responsibility (OBR) — the UK’s independent fiscal watchdog that analyses the government’s spending plans and their economic impact — said in its assessment of the budget that removing the cap will cost around £2.3 billion.

Tackling the prolonged cost-of-living crisis as UK inflation stays high was another key part of the budget. Reeves also froze fuel duty, rail fares and prescription charges — and announced above-inflation rises to the minimum wage and pensions.

Alongside the budget measures, the government amended its forecast for UK economic growth.

Britain’s economy is on target to beat growth forecasts this year but likely to slow more than previously expected between 2026 and 2029.

Gross domestic product growth is set to hit 1.5 percent in 2025, up from the previous estimate of 1.0 percent given in March, the Office for Budget Responsibility said in a report accidentally released ahead of Reeves unveiling her annual budget to parliament.

GDP growth is predicted to slow to 1.4 percent next year, while it is forecast to reach 1.5 percent between 2027 and 2029, the OBR added.