A raft of tax rises will come into force next year, meaning households up and down the country face paying thousands more in tax.
Rachel Reeves raised taxes by £40bn in the Budget in October, and borrowed an extra £30bn in order to avoid having to make real-terms public spending cuts which had been pencilled in by the Conservatives.
The Chancellor could even hit the public with extra tax rises if borrowing costs increase and place a strain on the public finances, economists have warned.
Concern over the cost of living, with tax rises on the horizon, has filtered through to voters, who do not believe Sir Keir Starmer can improve living standards next year despite his pledge to put more money in people’s pockets.
Analysis by the Institute for Fiscal Studies (IFS) for The Telegraph claimed middle-class families face an £8,000 increase in their tax bills in 2025.
But this would only apply to a family with two high earning adults and a child in private school.
Here’s why they face paying more – and what Reeves’s tax rises mean for other earners.
VAT on private school fees
Labour’s flagship education policy, applying 20 per cent VAT on private schools, comes into effect on 1 January.
Parents with children at private schools have been warned to expect fee rises as schools pass on the cost of the VAT rise.
A household made up of two adults each with a salary of £55,910 – the average wage of those in the top 20 per cent of earners, according to the Office for National Statistics (ONS) – with one child attending private school will be hit by an extra £7,730 of tax in 2025, according to the IFS analysis for The Telegraph.
This includes £2,626 extra in private school fees.
Bridget Phillipson, the Education Secretary, has defended the policy, saying that tax breaks for private schools are a “luxury our country cannot afford”.
She has criticised the decision by some private schools to pass on the full 20 per cent cost to parents, pointing out that schools will be able to reclaim VAT paid on capital projects and educational supplies, meaning many will be liable for 15 per cent VAT.
Independent schools have campaigned heavily against the policy, claiming it will force schools to close and cause an exodus of private school pupils due to fee increases, therefore flooding the state sector.
But the Government has insisted the policy is necessary to sustain the underfunded state sector, claiming it will raise up to £1.7bn by 2029-30.
Frozen income tax and national insurance thresholds
By freezing tax thresholds – which means not increasing them in line with inflation – voters pay a lot more in tax.
Reeves announced in the Budget that she is unfreezing income tax and national insurance thresholds – the point at which earnings trigger different taxation amounts: basic, higher or additional. However this won’t change until April 2028.
It means some people will be pushed over the personal allowance – which is currently £12,570 – and be forced to pay income tax and national insurance for the first time, while others find themselves facing a higher or additional rate tax.
These workers will pay tax on an additional £2,624 a year, compared to the thresholds rising with the rate of inflation, leaving all workers earning between £12,571 and £125,140 around £524 worse off each year as the “stealth tax” of threshold freezes means more of their income is taxed.
The IFS analysis suggests the tax threshold freezes will cost two adults earning £55,910 a total of £3,520 extra a year.
Someone working 40 hours per week on a minimum wage of £12.21 an hour, with no pension contributions, will be paying £510.80 more annually, according to leading accountancy firm Blick Rothenberg.
Council tax rises
Council tax increases are another reason why families across the country – with high, middle and lower incomes – will see their tax bill increase.
From April, council tax bills are likely to rise by up to 5 per cent in England, after the Government confirmed earlier this year it was sticking with the current cap on increases, paving the way for local authorities to raise the levy.
Communities Minister Matthew Pennycook told the Commons this was the “right threshold”, as he pointed to the pressures on council budgets.
It means the average household, living in a band D property, will see their council tax bill increase by up to 5 per cent in 2025.
Given the average band D council tax bill in England is currently £2,171, this could mean a rise of £109.
Employer national insurance increase
The Government will increase national insurance contributions for employers from 13.8 per cent to 15 per cent from 6 April 2025, as announced by Reeves on 30 October.
On top of this, the threshold for when employers need to start paying the tax will be lowered from £9,100 to £5,000.
Although these changes won’t affect most people directly, prior to the Budget some critics suggested that such a change could have a knock-on effect on employees, through employers offering lower pay increases or less generous employment benefits in future.
Stamp duty holiday comes to an end, plus rates hiked on second homes
The current extra stamp duty relief for first-time buyers and home movers in England and Northern Ireland is set to end on 31 March 2025.
From 1 April, the stamp duty threshold for first-time buyers will drop from £425,000 to the previous rate of £300,000.
From the same date, home movers will pay stamp duty on purchases over £125,000, rather than the current £250,000.
This will see a home buyer completing on a property worth £500,000 in England or Northern Ireland paying £15,000 in stamp duty – a rise of £2,500 on the current level of £12,500.
The Budget also saw stamp duty for buy-to-let properties and second homes increase by 2 per cent to 5 per cent – a change which took place immediately.
Reeves said this would support more than 130,000 additional transactions from people buying their first home, or moving home, over the next five years.
Tim Bannister, Rightmove’s property expert, said the increase means that a landlord faces an additional charge of more than £7,000 on a £371,958 home – the average asking price.
Sin taxes and the new grocery tax
So-called “sin taxes” on tobacco and alcohol were also targeted for rises in the Autumn Budget and will hit families in 2025.
From 30 October 2024, tobacco duty has risen by the Retail Price Index (RPI) measure of inflation plus 2 per cent. Duty on hand-rolling tobacco has risen by RPI plus 10 per cent.
Meanwhile, from 1 February 2025, alcohol duty will rise in line with September 2024’s RPI rate of inflation, which stood at 2.7 per cent.
However, alcohol duty rates on draught products, such as beer, below 8.5 per cent alcohol by volume (ABV) will be cut by 1.7 per cent, reducing the amount of tax on an average-strength pint by 1p.
The grocery tax – a new government net zero legislation – is also expected to hike up families’ tax bills next year.
Formally named the Extended Producer Responsibility, the new green levy is thought to cost shoppers up to £56 a year more, according to calculations published by the Department for Environment, Food and Rural Affairs (Defra).
However, the British Retail Consortium claims the tax will cost the industry around £2bn a year. If this figure was passed entirely onto consumers, the average household food bill would rise by £70 a year, according to the BRC.
Grocery bills will only rise to the extent that retailers choose to pass on their additional costs to customers.
