Reeves blinked on income tax and chose fiscal drag instead

(UPDATED)

• The Budget on 26 November 2025 delivered around £26bn of tax rises, but not via the headline rate hike Starmer was telegraphing earlier in the month. The Chancellor instead extended frozen thresholds to 2030-31 and stitched together a "smorgasbord" of smaller measures.

• Tax-to-GDP is heading to a post-war high of 38%. Fiscal headroom doubled to around £22bn, which is still only 0.6% of GDP and thin against forecast volatility.

• The detail is where it bites: 2pp uplifts on savings, dividends and property income, ISA reform, new capital allowances, and salary-sacrifice changes from 2029. Plenty for businesses and households to plan around.

What happened

On 10 November 2025, Sir Keir Starmer told Labour MPs the Budget would rest on "tough but fair" decisions and protect the NHS, fuelling expectations of an income tax rate rise and therefore a manifesto breach. Two weeks later, on 26 November, Rachel Reeves U-turned. Rates were left untouched, but income tax thresholds were frozen for a further three years to 2030-31, alongside 2pp increases on savings, dividends and property income, plus a long list of narrower measures.

Context & data

• The Budget raises taxes by around £26bn by 2029-30, lifting the tax burden to 38% of GDP, the highest on record

• The cumulative cost of the threshold freeze since 2022/23 sits at around £66.6bn, making it the largest tax rise in at least 60 years on the OBR's own calculations

• The freeze drags 780,000 more people into basic-rate income tax and 920,000 into the higher rate by 2029-30

• Fiscal headroom against the current-budget rule rose to around £22bn (0.6% of GDP), and the OBR puts the probability of meeting the rule at 59%, barely better than a coin toss

• The 10-year gilt yield fell about 7bp on Budget day to around 4.43%, the largest relative move on a Budget day since 2006. Goldman Sachs forecasts 10-year yields at 4.0% by end-2026 and Bank Rate at 3.0% by summer 2026

My take

The headline-grabbing measures aren't really the story. The freeze on personal allowances and rate bands until 2030-31 is doing most of the heavy lifting, and that's a slow, mechanical tax rise that lands on every PAYE earner with a pay rise. Add the 2pp uplift on savings income from April 2027, 2pp on dividends from April 2026, and the new separate property income rates of 22%/42%/47% from April 2027, and the people most affected aren't the headline "wealthy". They're owner-managers paying themselves through dividends, retirees with savings sitting in cash, and small landlords. Each of those groups has planning to do, not least around dividend timing pre-April 2026 and ISA mix once the £8,000 stocks-and-shares minimum kicks in from April 2027.

For trading businesses, the picture is more mixed than the headlines suggest. The new 40% First-Year Allowance from January 2026 widens relief to sole traders and partnerships, and to assets previously excluded from full expensing, which is a genuine cashflow benefit. But the cut in the main-rate writing-down allowance from 18% to 14% from April 2026 erodes relief on existing pools and second-hand assets, so net capex relief depends heavily on what you're buying. The salary-sacrifice NIC change doesn't bite until April 2029, but it's worth modelling now into reward design. None of this is dramatic on its own. Cumulatively, it's a meaningful re-pricing of the tax base.

Risks & watch-list

• Back-loaded measures. Around 90% of new revenue arrives in the second half of the forecast, close to the next election, which carries credibility and political-survival risk

• Behavioural drag. Higher savings, dividend and property income rates may push real money around rather than simply raise it. Landlord disposals and dividend acceleration are the obvious ones

• Productivity downside. OBR assumes 1.5% trend growth, NIESR has 1.25%. A miss reopens the fiscal hole

• Compliance burden. A "smorgasbord" Budget means more rules, more boundaries, more advice, and an HMRC stretched on capacity