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. 

The hidden savings tax trap and why changes to ISAs make it harder to put money away

By Charlie Flockhart • June 4, 2026
Do you know what your Personal Savings Allowance is? While most taxpayers in the UK will know the thresholds for Income Tax, a worrying few know the way in which personal savings can be subject to tax. With ISAs set for a significant overhaul, understanding the less tax-efficient saving options will soon be more important. How much tax do you pay on your savings? While your savings are not taxed, any interest generated by those savings could be subject to tax if it exceeds your Personal Savings Allowance. Depending on the rate of Income Tax you pay, your Personal Savings Allowance will differ. The thresholds are: £1,000 for Basic-rate taxpayers £500 for Higher-rate taxpayers £0 for Additional-rate taxpayers ISAs remain the more tax-efficient saving strategy as the interest generated from them is tax-free. It is therefore most effective to utilise the full £20,000 saving limit for an ISA as early in the tax year as possible to benefit the most from the accumulation of interest. How should tax on savings be managed? The main issue is that tax on savings is often overlooked, resulting in HMRC taking action for underpaid taxes. This will often manifest in a charge through PAYE, as employees are more likely to overlook this obligation. Those filing Self Assessment tax returns should already be declaring interest earned, so any compliance issue in that group points to a wider problem with handling tax obligations. When attempting to make the most of saving strategies, it is best to seek professional financial advice. This will be more important if the saving limit for Cash ISAs falls to £12,000 for under-65s in 2027 as proposed, leaving younger savers to have to find new ways to grow their wealth. Our professional team can help you to determine an effective saving strategy that suits your financial goals while helping you to be mindful of the tax obligations that you may face. We do not want to see anyone caught off-guard by an unexpected tax bill and understanding your exposure is vital for preventing this. Get in touch with our team to regain confidence in your saving strategy.

Salary sacrifice cap and the squeezed middle

By Charlie Flockhart • June 4, 2026
The £2,000 cap on National Insurance (NI) free salary sacrifice pension contributions was sold as a tax on high earners but, if you look closer, the opposite is true. In fact, the people most exposed are middle-income savers and the small businesses that employ them. For the so-called “squeezed middle”, it is yet another quiet hit to take. Why do the rules adversely affect middle-earners? From April 2029, salary sacrifice tax relief will continue to be available, but only the first £2,000 of employee pension contributions each year will be free of NI. Anything above that becomes liable to NI for both the employee and the employer and the full adverse effect is clear once the different rates of NI are accounted for. If a person’s total pension contributions are modest, say up to six per cent, those individuals who earn between £35,000 and £50,270 will pay an eight per cent NI charge on pension contributions above the £2,000 cap. By contrast, an individual whose earnings already exceed the upper earnings limit of £50,270 will pay employee NI at just two per cent on those same excess contributions. This imbalance in the NI system means that those on lower incomes could pay four times the NI rate on their pension savings in excess of the new threshold than the highest earners pay. How does this change affect employers’ National Insurance bills? Many employers currently share their own NI savings by topping up staff pensions, but a new 15 per cent employer NI charge on contributions above the cap makes those top-ups unaffordable for a lot of firms. As a result, some employees could see the overall efficiency of their pension saving above the cap fall by as much as 23 per cent once lost top-ups are counted. Even those who stay below the threshold are not safe, as the Office for Budget Responsibility (OBR) estimates that around 76 per cent of higher employer costs are eventually passed back to staff through weaker pay rises and trimmed benefits. Don’t wait for the change The good news is that there is time to plan, as the rules do not take effect until April 2029, which leaves room to act while current allowances still apply. If you are a middle earner, this is exactly the moment to review your pension strategy, weigh up complementary options such as ISAs and make sure your retirement plans stay on track. To talk through what the salary sacrifice cap means for you, please get in touch with our team.

Government summer savings spree adds complexity to VAT for hospitality and tourism

By Charlie Flockhart • June 4, 2026
When Rachel Reeves announced a temporary cut in VAT from 20 per cent to five per cent for family attractions and children’s dining over the summer holidays, the hospitality and leisure sectors broadly welcomed it. The scheme runs from 25 June to 1 September and is funded, according to the Treasury, by closing a tax loophole used by oil and gas companies with overseas operations. On the surface, this looks like good news worth welcoming. However, for the businesses applying the new rules, the reality of delivering the rate cut is more complicated than the headlines suggest. The rules shift from one service to the next How the cut works depends heavily on what is being sold. Admission tickets to amusement parks, water parks, zoos, museums, soft play and similar venues qualify, as do children’s and family tickets to cinemas, theatres and concerts. However, pay-per-ride attractions do not. Children’s meals only qualify when served from a clearly marketed, separate children’s menu. A smaller portion of an adult dish does not count, nor does a discounted adult meal or a takeaway. Season tickets and annual passes are generally excluded too. The result is that many businesses will apply two VAT rates at once on the same bill. Tills, accounting systems and front-of-house staff all need to handle that from day one, then revert again from 1 September. This adds an additional layer of complexity to VAT reporting that businesses need to consider right away. Encouraged, but not required The Government has urged businesses to pass the saving on to customers and the Competition and Markets Authority has new anti-profiteering powers to prevent unethical activity. Even so, there is no legal obligation to lower prices at the till and many businesses will weigh up rebuilding margin, reinvesting and matching competitors before deciding exactly what savings to offer to consumers. Given the wider cost challenges that businesses currently face, the scheme may not deliver the lift at the till that many customers are expecting. Right idea, wrong season? There is also a question of timing. The scheme targets the period when families already spend most on days out and when operators are near capacity. A cut would arguably do more for businesses in the quieter autumn and winter months. As designed, it looks more like household support than business stimulus. Any support for the sector is welcome, provided businesses seek the expert guidance required to manage obligations and make the most of any new opportunities. If you would like to discuss what the temporary VAT cut means for your business, please get in touch with our team.