The Labour Party pledged not to raise taxes on working people—specifically ruling out increases in National Insurance, income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates, and value-added taxes (VATs)—but several tax measures announced today are putting the burden on the working class. The tax hikes include a freeze on income tax and national insurance thresholds, removal of pension tax breaks on salary sacrifice schemes, a 2 percentage point tax rate increase on dividends, property and savings income taxed at the basic or higher rate, a pay-per-mile levy for electric vehicles starting in 2028, and a new council tax surcharge for high-value homes. Other measures include cutting capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. relief on employee ownership trusts from 100 percent to 50 percent, and increasing gambling taxes to address social harms.
Raising Labor Taxation
Of the £26 billion overall tax increase, nearly a third (£8 billion) will come from raising labor taxation through freezing personal thresholds.
Freezing income or National Insurance taxes thresholds for three more years, up to 2031, will increase the UK’s tax burden on labor, reducing the after-tax return on work, discouraging additional hours and workforce participation, and ultimately risks shrinking the labor supply while slowing economic growth. Additionally, employers often share the burden of payroll taxes, which raises the cost of hiring. Over time, this can suppress wage growth and reduce job opportunities.
Raising the Tax Burden on Savings
Changes to the tax treatment of savings make up nearly as much with another £6.8 billion of the overall tax increase: £4.7 billion from the removal of the pension tax breaks and £2.1 billion from increasing tax rates on dividends, property and savings income by 2 percentage points. While the planned changes would remove some distortions caused by tax subsidies for pension contributions, they would also increase double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of savings and limit the investment choices of British savers.
Removing pension tax breaks to salary-sacrificed pension contributions and capping the tax-free benefit at £2,000 (from 2029) would mean contributions above that limit incur National Insurance contributions (NICs)—8 percent for employees earning under £50,000, 2 percent for higher earners, and 15 percent for employers. However, ordinary employer pension contributions will remain exempt from NICs.
Currently, salary-sacrificed pension contributions above £2,000 and the resulting pension income are both exempt from NIC, unlike income that is spent on immediate consumption or saved and invested in capital markets. Ideally, workers should be taxed on their income exactly once, either when earned or when withdrawn for spending, to avoid compounding disincentives to both work and savings or the misallocation of funds into specific savings vehicles.
The UK government is also reducing the annual Cash Individual Savings Account (ISA) allowance from £20,000 to around £12,000 (from 2027). However, this new limit will not apply to savers over the age of 65. This move aims to redirect savings into different forms of investments and reduce the budget gap. The government hopes that lower cash limits will push savers toward equity markets. Additionally, a smaller tax-free allowance means more interest could become taxable, generating extra income for the Treasury.
However, savers who prefer to put their savings in more liquid assets in ISA cash accounts might move excess savings to standard accounts, pension contributions, or immediate consumption, rather than investing in shares. The flexibility of the UK’s ISAs is a core feature, allowing large parts of the population, including liquidity-constrained households, to build savings without incurring tax penalties.
This measure could inadvertently impact lenders. Building societies—mutual institutions that fund mortgages mainly through customer savings—depend on ISA deposits as a cheap source of capital. Cutting ISA limits reduces these inflows, forcing societies to seek costlier funding or raise mortgage rates.
Savings income generated outside of ISAs will face a 2-percentage point tax increase on dividends, savings, and property lifting the basic rate to 10.75 from 8.75 percent and the higher rate to 35.75 percent from 33.75, respectively. The additional rate would remain constant at 39.75 percent, currently the third-highest top rate on dividends in Europe. Without expanding ISAs, the changes will result in increased double-taxation of earnings that are saved and invested for higher liquidity and future consumption.
Tax Changes Affecting Investment and the Cost of Capital
The budget contains multiple measures directly affecting the cost of capital and domestic investment in the United Kingdom: a reduction in capital allowances for assets in the main rate pool, with some exemptions for leased assets, and a three-year tax holiday for newly listed public companies.
To encourage investment, the government wants to add a 40 percent first-year allowance for leased assets, not eligible for full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.. However, the budget also announced a reduction to the writing down allowance (WDA) main rate to 14 percent from 18 percent, which will reduce the real value of deductions for assets in the main rate pool to 70 percent from 75.9 percent of investment costs. In contrast, the real value of deductions for leased assets in the main rate pool benefitting from the 40 percent first-year allowance will increase to 86.4 percent.
Allowing businesses to recover the full cost of their investment is one of the most cost-effective ways for tax policymakers to encourage investment and economic growth, making the reduction to the WDA an unnecessarily harmful way to raise £1.5 billion in additional tax revenue.
Additionally, the new budget approved a stamp duty holiday for the first three years after a company is listed on the London Stock Exchange. Stamp duty reserve tax applies at a 0.5 percent rate on the sale of shares, directly increasing the cost of raising capital for UK-listed companies.
While the stamp duty holiday could reduce the cost of raising capital for some newly listed public companies, most frequently traded shares that are subject to the highly distortive effects of stamp duty would be unaffected by the reform. Previous studies have suggested that abolishing stamp duty reserve tax entirely would raise the price of frequently traded shares by 0.4 to 1.1 percent, offsetting 70 percent or more of the revenue shortfall.
Measures to Reduce Tax Avoidance
The Making Tax Digital regime will require UK self-employed people and landlords to use commercial software to submit quarterly income and expense information along with annual returns, starting in April 2026. While this measure might reduce tax avoidance and raise additional revenue, it also increases the administrative tax burden.
Growth Matters for Revenue
Although the UK budget prioritizes fiscal consolidation, albeit mainly through tax increases, the government should instead emphasize spending reductions and implement pro-growth tax policies.
To foster sustainable growth, it is essential to recognize that not all taxes are equal—there is a hierarchy of more and less efficient ways to raise revenue, as different taxes affect the economic activity to varying degrees. Unfortunately, this budget misses an opportunity to tackle the deeper structural problems of the UK’s tax code, such as abolishing its highly distortionary stamp duties and improving capital allowances for buildings and structures while broadening the VAT base.
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