Chancellor of the Exchequer Rachel Reeves delivered a short speech from Downing Street today ahead of her second budget announcement as finance minister on Wednesday, November 26.
The 20-minute speech promised a budget of “fairness and opportunity” as she pledged to “make the choices necessary to deliver strong foundations for our economy” for “years to come”.
But as rumours of tax rises swirl, what should you expect when the big announcement is made in just three weeks’ time? And what does it mean for your finances? We’ve broken it down for you here:
What is the budget?
You’ve probably heard the word ‘budget’ being thrown around a lot lately. But what actually is it? And how does it affect the pennies in your pocket?
Put simply, the budget is a statement that gives an overview of the current state of the UK economy and outlines the government’s tax and welfare policies for the upcoming year. It sets out how much the government plans to raise through taxes, how this money will be spent, and how borrowing will be managed.
It also includes an economic forecast from the Office for Budget Responsibility (OBR), which is the public body set up to provide an impartial review of public finances. In short, it’s the country’s financial plan of action for the year ahead.
Will taxes increase?
This year’s budget is expected to see the Labour party break its manifesto promise not to increase income key taxes, including income tax, VAT, and National Insurance.
When asked whether tax rises were likely, Reeves refused to give a definite answer, stating, “That’s not what today is about. Today is about setting the context up for that budget.” Despite this, experts are predicting a one percentage point tax increase, which is equivalent to 1p for every pound.
This would mark the first increase to the basic rate of income tax in almost 50 years, with the last hike announced in 1975. But with inflation currently sitting at 3.8% – nearly double the Bank of England’s 2% target – and a £22 billion shortfall in the nation’s finances, a rise is looking increasingly likely.
How does income tax work?
Income tax is divided into three bands in England, Wales, and Northern Ireland, known as ‘rates’. Here’s a quick overview of how much you’ll pay based on your earnings:
| Band | Taxable income | Tax rate |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | £125,141 and above | 45% |
In Scotland, income tax is divided into six bands. Here’s how they work:
| Band | Taxable income | Tax rate |
| Starter rate | £12,571 to £15,397 | 19% |
| Basic rate | £15,398 to £27,491 | 20% |
| Intermediate rate | £27,492 to £43,662 | 32% |
| Higher rate | £43,663 to £75,000 | 42% |
| Advanced rate | £75,001 to £125,140 | 45% |
| Top rate | £125,141 and above | 48% |
Regardless of where in the UK you live, you don’t have to pay tax if you earn less than £12,570.
What would tax rises mean for me?
With the last income tax rise announced almost 50 years ago, it’s worth knowing what an increase could mean for you. After all, it is your hard-earned money that will be affected.
If you earn £20,000 a year, you’re currently paying £1,486 in income tax each year. If rates were raised by 1% as predicted, your annual income tax would increase by £74.30. That’s £6.19 a month.
However, if you earn the average UK salary of £35,000 a year, you’ll pay an extra £18.69 a month in income tax, meaning you’ll be £224.30 worse off.
