Autumn Budget 2025 Unveiled

On the 26th November, Rachel Reeves delivered the 2025 Autumn budget, aiming to restore financial and economic stability in the UK. Her plan includes roughly £26 billion in new taxes by the end of Labour's time in Parliament (2029). Key changes included a freeze on income tax thresholds until 2031, which will lead to many UK households paying more tax over time as wages naturally rise due to inflation, ultimately resulting in bracket creep. Furthermore, the chancellor introduced higher dividends taxes; putting them up by 2 percentage points from April 2026. The budget also set out to tighten various reliefs and incentives; for example, the government introduced a narrower eligibility criteria for several Capital Gains Tax reliefs, as both Entrepenuers' and Business Asset Disposal Relief thresholds were tightened. This was on top of certain investment related CGT reliefs being capped to prevent high-income investors from using such reliefs as tax shelters. The chancellor argued that the tightening focuses on preventing taxpayers from classifying their regular investment gains as business gains to obtain lower tax rates, reducing tax leakages. We've spoken alt about taxes so far, what did the government do with spending? Well firstly, the standard allowance in Universal Credit will increase in April 2026, alongside state pensions rising and a minimum wage increase for 18-20 year olds from £10 to £10.85. The national living wage will also see an uptick to £12.71/hr, again, starting in April of 2026. The government has also made a commitment to infrastructure, confirming their plan to increase capital spending through to 2029.

Market Reaction

Perceived risk for gilt markets increased as the budget sparked concern among investors regarding government borrowing levels and the burden of tax. As borrowing is set to remain high, long-term bond yields consequently rose. On the other hand, demand for inflation-linked gilts remained strong, implying that many investors are looking for protection against inflation despite the new budget. Analysts, including the likes of Hargreaves Lansdown have stressed their concerns about the new fiscal measures, specifically the potential of the combination of higher dividend taxes, frozen income tax thresholds and tighter reliefs to leave households with less disposable income, reducing their ability and capacity to spend. Such drag on household consumption will of course soften retail demand in early 2026, and for businesses the tighter tax environment coupled with weaker consumer demand will almost certainly delay investment decisions. This could therefore entail slower GDP growth in the near term as both consumption and private investment contract from what are arguably already subdued levels. On such a topic, Goldman Sachs has forecasted UK GDP growth to remain modest in 2026, at around 1.1% due to the mentioned reasons. On a slightly more positive note, inflation has been forecasted to reach approximately 2.3% by 2026, which was largely down to lower energy bills and a cooling labour market. Goldman has cautioned that weaker tax receipts from slower growth, higher welfare spending commitments, and the cost of maintaining public investment programmes will put government borrowing above earlier projections.

What this Means for the UK Economy & BoE Strategy

For the BoE, the budget certainly complicates the outlook. Their is a lot for them to consider, while their are positive signs for inflation due to lower energy bills, their is no denying that lower household consumption and business investment from giver taxes could suppress growth. Meanwhile, long term infrastructure investment could boost the UK's long run productive capacity and hopefully improve productivity, but some analysts have presented the counterpoint that such projects have long lead times, creating short term strain as the government has chosen to fund such projects by the means of introducing significant tax measures, reducing real disposable incomes. Ultimately, some analysts would argue that we should be prioritising long term strategy over the current short terms that we see over and over again in political economy. However, others may argue that in this specific case, long term plans require short term stability. I.e., if household consumption weakens today, demand weakens, which can drag an economy downwards before long term projects ever deliver results. Furthermore, a struggling short term economy means lower investment and lower tax revenue which can often undermine the ability to fund long term goals such as large scale infrastructure and capital spending projects. Another point presented by some analysts is that long term infrastructure is only beneficial to productivity if businesses survive the near term, so sometimes such measures may lead to some business not even being around to benefit from improved infrastructure years later.