Rachel Reeves targets UK’s wealthiest in £26bn tax-raising budget

Rachel Reeves targeted Britain’s wealthiest households with a £26bn tax-raising budget to fund scrapping the two-child benefit policy and cutting energy bills.

On a chaotic day that involved key details of her budget accidentally being released early by the Office for Budget Responsibility (OBR), the chancellor defended the measures, saying she was “asking everyone to make a contribution to repair the public finances”, but that she wanted the wealthiest to pay the most.

While insisting she had avoided reckless borrowing and dangerous cuts, the budget will push the tax take to an all-time high of 38% of GDP in five years’ time.

More than 1.7 million workers will be dragged into either paying tax for the first time or pushed into a higher band by an additional three-year freeze on income tax and national insurance thresholds – that Reeves conceded would hit “working people” but bring in £12.4bn by 2030-31.

Some Labour MPs privately expressed alarm at the extent to which the budget would hit the so-called “squeezed middle” including more nurses, teachers and police officers paying the higher rate tax.

Almost one in four taxpayers, 24%, will be paying the higher or additional rates in five years’ time as a result of extending the threshold freeze, a process known as “fiscal drag”. The OBR said the threshold freeze would bring an additional 780,000 people into paying the basic rate of income tax; 920,000 into paying the higher rate; and another 4,000 would pay the additional rate.

In a series of well-trailed measures, the chancellor targeted the rich via a new council tax surcharge for properties worth more than £2m and announced a 2p tax increase on income from dividends, savings and property. Contributions to “salary sacrifice” pension schemes, on which employers pay no national insurance, will be capped at £2,000 from 2029 – bringing in a significant £4.7bn a year.

Reeves later told journalists that she did not believe she had broken the Labour manifesto with the threshold freeze. “If you read the manifesto, we are very clear, we say ‘the rates of income tax, NI and VAT’, but if you are asking does this have a cost for working people, I acknowledge it does,” she said.

The OBR said the tax squeeze would hit living standards, with real disposable household income scheduled to rise by just 0.25% a year over the forecast period – weaker than it expected in March.