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What is the UK budget and why does it matter?

  • Writer: Two Teachers
    Two Teachers
  • 7 hours ago
  • 4 min read

Every year the UK government explains how it plans to raise money and how it will spend it in the year ahead. This explanation is called the Budget. The Budget is presented in Parliament by the Chancellor of the Exchequer (the current Chancellor is Rachel Reeves).


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The Budget sets out changes to taxes, public spending and government priorities. These decisions affect the whole country. They influence how much people pay in tax, how much support households receive, and how much money goes into important public services such as education, healthcare and transport.


Understanding the Budget will help you as a business student to see how government decisions link to the real world. It also helps with topics such as fiscal policy, consumer spending and the wider economy.


Why the Budget is announced?

The government announces a Budget to:

  • show how it plans to raise money through different taxes

  • explain how it will spend money on public services and support schemes

  • help manage the national economy, borrowing and debt

  • respond to economic conditions such as inflation or slow growth

  • give people, businesses and investors a clear idea of what to expect


The Budget helps create stability because it sets out what the government plans to do in the year ahead.


Key points from the Budget on 26 November 2025

On 26 November 2025, Rachel Reeves delivered the latest Budget. Below are the main changes explained in simple terms, with real life examples to help you understand the impact.


  1. The freeze on income tax thresholds

The government announced that income tax thresholds will stay the same until at least 2030 to 2031. This means the points at which people start paying tax, or move into a higher tax band, will not rise with inflation.


When wages rise but thresholds stay fixed, more of a person’s income may be taxed at a higher rate even if their real income has not improved. This effect is known as fiscal drag.


For example, if a worker earns £40,000 and their pay rises to £43,000 due to inflation, the higher income will push more of their earnings into a higher tax band because the thresholds have not moved. They pay more tax even though their pay rise only matches the increase in prices.


A similar situation affects lower earners. If someone earns £13,000 and their income increases to £15,000, more of their pay becomes taxable because the personal allowance has not increased.


  1. Higher taxes on savings, dividends and property income

The Budget also increased taxes on income earned from savings, dividends and rental properties. The aim is to bring the tax on income from assets more in line with income earned from work.


One change is that basic rate tax on savings interest will rise from 20 per cent to 22 per cent from April 2027. For a saver earning £1,000 interest per year, the tax paid on that interest will increase by £20.


Another change affects rental income. People who earn money from letting out property will face higher tax rates. For example, a small landlord earning £10,000 a year in rental income will see their tax bill rise because the rate applied to property income has increased.


Dividend tax will also rise from April 2026. Someone who receives £2,000 in dividends from shares may pay more tax unless the dividends are held within an ISA.


  1. Changes to ISA allowances and property taxes

The Budget included two other important changes that affect savers and homeowners.

The annual allowance for cash ISAs will be reduced from £20,000 to £12,000 from April 2027.


This means that someone who wishes to save £15,000 each year in a cash ISA will no longer be able to put the full amount into this tax free account. They will have to save the remaining amount elsewhere, possibly in an account with more risk.


Homes valued at more than £2 million will face a higher council tax rate. For example, a homeowner whose property is worth £2.5 million will receive a larger council tax bill due to the new surcharge.


How the Budget might affect people

The overall impact of the Budget depends on a person’s situation. Some of the possible effects include:

  • more people paying higher levels of tax even if their wages only rise with inflation

  • savers and investors receiving lower returns after tax

  • reduced benefits from cash ISAs for younger savers

  • higher costs for owners of very expensive homes

  • changes in business behaviour, such as pricing, hiring and investment decisions

  • long term pressure on households to change their financial planning

The government says these measures are designed to raise revenue fairly, support public services and keep inflation under control.


Why this matters for business and economics students

This Budget gives students a clear, real world example of how government decisions affect:

  • personal income

  • consumer behaviour

  • business costs

  • confidence in the economy

  • investment and hiring decisions


It helps students understand fiscal policy and prepares them for exam questions about government influence on the economy.


Questions for business students to consider:

  1. If wages rise but tax thresholds stay the same, why might some people end up paying more tax?

  2. How could the changes to savings and property taxes affect people’s decisions about saving and investing?

Extension task: explain how this Budget could influence the decisions that businesses make in the next year. You should consider costs, consumer spending and confidence in the economy.


References

Sky News. What is a freeze on income tax thresholds and will you pay more.https://news.sky.com/story/budget-2025-what-is-a-freeze-on-income-tax-thresholds-and-will-you-pay-more-13475258

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