UK Budget Predictions 2025: Will Labour Increase Personal Tax Allowance for Working Families?

As the nation anticipates the UK budget predictions for 2025, the core question on the minds of working families is this: Will the government increase personal tax allowance? With the new Labour government expected to bring sweeping reforms, families, small businesses, and investors are hoping for relief amidst rising costs and a shifting economic landscape.

Background: The 2024 Political and Economic Landscape

Following years of stagnation and austerity from the previous government, the Labour Party now faces the monumental task of restoring economic stability. Public dissatisfaction with frozen tax thresholds, underfunded services, and lack of support for the average worker was a major factor in Labour’s victory. The Office for Budget Responsibility forecasts moderate economic growth, but challenges like inflation, wage stagnation, and interest rates persist.

Labour’s Economic Vision for 2025

The Labour Party, under a renewed manifesto to "Rebuild Britain", is expected to introduce policies that foster budget responsibility, boost public spending, and support working families. A cornerstone of their plan includes addressing the fiscal drag caused by frozen personal allowance and tax bands, essentially taxing people more without raising nominal rates.

Income Tax and Personal Allowance Adjustments

Personal Tax Allowance: A Lifeline for Working Families?

One of the most anticipated questions in the UK budget predictions 2025 is whether the Labour government will increase the personal tax allowance. Currently set at £12,570, the threshold has remained frozen, pulling more lower-income workers into higher tax brackets through fiscal drag. Raising this allowance could provide immediate relief to families struggling with the increased costs of living.

Potential Adjustments to Income Tax Bands

Labour is likely to review:


  • The basic rate (currently 20 per cent)
  • The higher rate (40 per cent)
  • The additional rate (4 per cent)


Any shift in these brackets, especially linked to inflation or median income growth, would significantly affect take-home pay.

Fiscal Drag and the Freezing of Tax Thresholds

Fiscal drag has been dubbed a “stealth tax” that erodes real incomes. Under current policy, thresholds for income tax, national insurance, and pension credit eligibility are frozen until 2028. This erodes value and pushes taxpayers into higher brackets as wages grow, even if their standard of living does not improve. Labour might move to unfreeze or raise these thresholds, counteracting this effect.

National Insurance Contributions and Salary Sacrifice Schemes

Reforms to national insurance contributions (NICs) are expected to align with Labour’s pledge to make the tax system fairer. This could include:


  • Adjustments to employee NIC thresholds
  • Expansion of salary sacrifice schemes for transport, pensions, and green benefits



These changes could improve net pay for middle-income earners and promote financial incentives for environmentally friendly behaviour.

Capital Gains Tax and Residential Property

Labour is considering levelling the playing field between income and capital gains by increasing the capital gains tax (CGT) rate or narrowing allowances. This could significantly affect:


  • Buy-to-let landlords
  • Second-home owners
  • Residential property investors


We may also see reform of carried interest and treatment of business assets, aimed at high-net-worth individuals and non-UK residents.

Inheritance Tax Threshold and Business Assets

The inheritance tax threshold has remained static, affecting middle-class families disproportionately. Labour may look to:


  • Increase the nil-rate band from £325,000
  • Restrict relief on business assets
  • Address loopholes around connected persons



This would reflect a broader strategy to ensure wealth is taxed more progressively.

National Living and Minimum Wage Adjustments

Labour is expected to increase both the national minimum wage and the national living wage to support lower-income workers. The increases may be tied to median earnings rather than inflation, ensuring real-terms growth.

Wage Type 2024 Rate Projected 2025 Rate
National Minimum Wage (21+) £11.44 £12.20 to £12.50
National Living Wage £10.42 £11.50 and above

Such increases could also influence employment allowance policies to help small businesses adapt.

Reforms in Private School Fees and VAT

One controversial yet likely policy is to apply VAT on private school fees. This would align private education with other luxury services and generate significant revenue.


Effects May Include:

  • Increase in school fees
  • Greater enrolment in state education
  • Expansion of boarding services provided by public schools


This aligns with Labour’s vision of equitable education funding.

Corporation Tax and Business Rates Relief

To support small businesses, Labour may maintain or slightly raise corporation tax while offering targeted business rates relief. The party has shown interest in simplifying VAT registration and creating incentives for green and digital businesses.

Stamp Duty and Property Market Outlook

Stamp duty may undergo reforms to assist first-time buyers and stimulate the residential property sector. Adjustments could include:



  • Raising the nil-rate band
  • Targeted support in low-growth regions
  • Incentives for energy-efficient homes

Pension Contributions, Tax Relief, and Lifetime Allowance

Labour might restore the lifetime allowance on pensions or introduce a cap again. Expected reforms include:


  • New limits on tax-free cash
  • Changes in pension contributions tax treatment
  • Simplifying pension credit qualification


These measures aim to sustain the basic state pension and promote long-term saving.

Addressing Tax Avoidance and Offshore Wealth

Combatting tax avoidance is high on Labour’s agenda. Policies may involve:



  • Greater transparency for non-UK residents
  • Reforming the tax treatment of offshore trusts
  • Enhanced reporting on business assets and income flows

Public Spending and Government’s Commitment to Services

Expect significant public spending in:


  • NHS and social care
  • Education
  • Green infrastructure



Funding will be supported by raising revenue through adjusted taxation and reduced avoidance, ensuring the government’s commitment to rebuilding public trust.

Office for Budget Responsibility and Budget Responsibility Targets

The Office for Budget Responsibility (OBR) will play a vital role in ensuring transparency. Labour may enhance its powers to audit all major budget announcements, reinforcing fiscal credibility.

Budget Announcements Timeline: Spring and Autumn Statements

Watch for major announcements during:


  • Spring Statement – March 2025
  • Autumn Budget – November 2025



Draft legislation, especially on fuel duty, tobacco duty, and new vaping duty, will be introduced incrementally.

Frequently Asked Questions (FAQs)

  • 1. Will the personal tax allowance rise in April 2025?

    Labour has hinted at reviewing the personal allowance. While a confirmed rise is not certain, it is highly likely as part of their support for working families.

  • 2. How will capital gains tax be affected?

    The rate may rise to narrow the gap with income tax, particularly on residential property and business assets.

  • 3. What is fiscal drag, and why does it matter?

    Fiscal drag refers to stagnant tax thresholds that pull more earners into higher brackets due to inflation. It is effectively a hidden tax increase.

  • 4. Will private school fees become more expensive?

    Yes, as VAT may be applied to these fees, making boarding services provided more costly.

  • 5. What support will small businesses receive?

    Reforms in business rates relief, corporation tax, and employment allowance are expected to support smaller firms.

  • 6. Will NICs thresholds change?

    Yes, to reduce the burden on low-income earners and align NICs with broader tax system reforms.

Conclusion

The UK budget predictions 2025 signal a major fiscal shift under Labour, with a likely focus on increasing personal tax allowance for working families, tackling inequality, and ensuring budget responsibility. While some higher earners and investors may see higher taxes, these changes aim to build a fairer, more sustainable future. Contact 10CA for more updates. 

Sequencing short-term finance effectively is vital for avoiding the interest trap

By Charlie Flockhart • September 9, 2026
For many businesses, short-term finance can provide an essential lifeline when cash flow becomes tight. Whether a business needs support covering a gap between paying suppliers and receiving customer payments, or managing seasonal demand, the right type of finance can keep a business moving during uncertain times. However, using short-term borrowing without a clear strategy can quickly become a slippery slope of missed payments and further injections of cash. Choosing the right type of finance for your business? Not all types of short-term finance are designed for the same purpose, so businesses need to choose the option that best matches their needs. An overdraft can provide a flexible cash buffer for day-to-day cash flow pressures, with interest usually charged only on the amount borrowed. Invoice finance can help unlock cash tied up in unpaid business invoices, while a short-term loan may be more suitable for funding a specific purchase or project. Problems can arise when businesses use one type of finance to solve an issue it was not intended to address. A short-term cash flow gap can turn into a long-term borrowing habit, causing interest costs and fees to build up over time and reduce profitability. How to avoid the interest trap? While short-term finance can be a valuable tool, it is important to understand the full cost of borrowing. Some forms of finance, such as certain credit cards, bridging loans and revolving credit facilities, can have higher interest rates and shorter repayment terms. Although these products can be useful in the right circumstances, they can place additional strain on businesses with unpredictable cash flow. Understanding the total cost of borrowing can help avoid unnecessary expense and ensure the finance remains affordable. Matching the right type of finance to the right business need can help businesses manage cash flow more effectively and avoid falling into an expensive cycle of debt. How can we help? Before you fall down the slippery slope of short-term finance, get in touch with an accountant. We understand that short-term finance can sometimes feel like the only option. Our team can help assess your cash flow needs, review your funding options and support you in choosing a solution that helps your business grow while keeping borrowing costs under control. For support with short-term finance options, get in touch with our team.

Inflation increases to a four-month high – How will businesses be impacted?

By Charlie Flockhart • September 9, 2026
The rate of inflation has hit 2.9 per cent in July 2026, up from 2.6 per cent in June, according to the latest data that has been published by the Office for National Statistics (ONS). This is the first rise in the national rate of inflation since March 2026, with the increase in the energy price cap being partly to blame. Businesses need to understand how this hike will affect them and what they must do to mitigate the issues. How is inflation affecting businesses? Higher inflation can increase the cost of running a business. Energy-intensive businesses and manufacturers are likely to feel the greatest impact, as rising energy prices can lead to higher production, transport and operating costs. Many businesses are already dealing with tight profit margins and may find it difficult to absorb these additional costs. Passing increased costs on to customers is not always straightforward, as consumers remain cautious about spending and may look for cheaper alternatives if prices rise too much. Inflation can also affect employment costs. Employees may expect higher pay to help maintain their spending power, creating additional pressure on business finances. With employment costs already rising, some organisations may take a more cautious approach to recruitment or delay planned investments. What should businesses do to mitigate the impact of inflation? With inflation remaining uncertain, businesses should review their budgets regularly and keep a close eye on cash flow. Understanding where costs are rising most quickly can help businesses identify areas where savings or efficiencies can be made. Businesses should also assess their pricing strategies to ensure they remain competitive while protecting profitability. Investing in technology, improving efficiency and carefully managing expenditure may help reduce the impact of rising costs. Strong financial planning and regular monitoring of business performance can help organisations remain resilient if inflation continues in the months ahead. How can we help? While the rate of inflation increasing to 2.9 per cent may not seem like a huge change, businesses must consider the impact that it will have on wider spending. Our team can help you manage your cash flow by completing financial forecasting to ensure that your business stays resilient should inflation rates increase further. For support with cash flow, get in touch with our team.

Gifting out of income – The overlooked way to reduce Inheritance Tax

By Charlie Flockhart • September 9, 2026
For many people, giving financial support to family members is an important part of their financial planning. Whether it is helping children with pension contributions or providing ongoing assistance, gifting can play an important role in Inheritance Tax (IHT) planning. The normal expenditure out of income exemption under Section 21 of the Inheritance Tax Act 1984 allows for gifts to be made without being chargeable for IHT purposes, if specific conditions are met. What are the requirements? Under Section 21, gifts can be exempt from IHT if they are part of a person's normal spending habits, are paid from their income and leave them with enough income to maintain their usual standard of living. This exemption only applies to gifts made from surplus net income, not from capital or savings. For example, withdrawals from an investment bond or the capital part of a purchased life annuity payment would not qualify. The donor must also be able to cover their normal living costs from their remaining income and cannot give away income and then use capital to make up any shortfall. Why is record-keeping important? As the exemption is usually claimed after death, it is important to keep clear records of any gifts made under the normal expenditure out of income rules. HMRC form IHT403 includes a schedule that can be used to record these gifts as they are made and can help support a future claim. To work out whether gifts need to be reported, the donor must add together any gifts made under this exemption and any chargeable lifetime transfers made during the previous seven years. If the total is more than the available nil rate band, all gifts must be reported to HMRC using form IHT100. HMRC will then review whether the exemption applies and confirm its decision in writing. If the total remains within the nil rate band, the exemption is usually reviewed only after the donor's death, when the executors can claim the exemption using forms IHT400 and IHT403. How can we help? Planning for IHT helps to safeguard your family's future, as utilising vital allowances enables you to minimise your IHT contributions. Our team of accountants can support you with gifting out of income so that you can provide for your family's future. Get in touch with our team for support with Inheritance Tax planning.