Lords scrutinise tax measures in the 2025 Budget

The House of Lords takes a more leisurely approach to debating the Budget than MPs, waiting until the week after to have its say in a single day of debate. Because of the financial privilege of the Commons the Lords do not have to approve Budget resolutions so the debate is simply to ‘take note of’ the Budget.

73 peers contributed during the six and a half hours debate. The report below picks out some of the more germane tax-related contributions.

Opening speeches from the minister and shadow minister

Opening the debate, Lord Livermore, Financial Secretary to the Treasury, set out the government’s key priorities, saying: “We have put increased investment at the heart of our growth strategy and made growth our number one priority.” He emphasised the need for stability, arguing that “by choosing to maintain economic stability, getting inflation and interest rates down, we are giving businesses the confidence to invest and our economy the room to grow”.

On the freezing of income tax thresholds, the minister accepted that this would affect working people, “but we have sought to keep their contribution as low as possible by making other fair and necessary reforms to the tax system.”

Lord Livermore highlighted the increase in taxes on property, dividend and savings income, explaining that the government “ are raising [these] taxes… which currently face no equivalent of national insurance, by 2% at the basic and higher rates and by 2% at the additional rate for property and savings income.” He labelled the government’s Budget decisions as ‘fair’, adding that they are reforming the tax system to keep pace with a fast-changing economy.

Baroness Neville-Rolfe, the Conservative shadow Treasury minister, argued that: “There are few pro-growth measures in the Budget but many that will hinder growth… It seemed that growth had served its political purpose and could be cast aside.”  She advocated for a tax system “with the right incentives and supply-side reforms to lift the burden of regulation”. “The Prime Minister is promising the latter,” she continued, “but the government’s actions do not match the rhetoric”.

The shadow minister accused the government of “shoring up problems for later”, highlighting that many tax rises come into force between 2028 and 2031, including the increase in thresholds. “The fall in borrowing depends on this tax tail. Is it realistic to think that this will actually happen in an election year? I think not.”

Asking was in Budget for SMEs, Baroness Neville-Rolfe noted “a small positive on apprenticeships”, but otherwise identified only “meagre and previously announced reforms to EMI schemes, VCTs and listing reliefs, massive new pressures on payroll from the threshold freezes, minimum wage hikes and salary sacrifice cap, a tourist tax, which will dampen demand, and a hideous mix-up over business rates which will lead to the closure of pubs and hotels.”

Income tax

A number of peers criticised the freezing of income tax thresholds, suggesting that it disproportionately impacts lower and middle earners. Lord Sikka (Lab) stated: “There is no justification for freezing the income tax threshold until 2030-31. This freeze forces 780,000 additional people to pay income tax for the first time. Another 920,000 will be pushed into paying income tax at a higher rate.” Instead, he suggested that taxing capital gains at the same rate as wages could have raised around £14 billion and enabled the government to increase income tax personal allowances by more than £1,000 a year.

Another Labour peer, Baroness Thornton, raised concerns about the impact of the measure, specifically on women, and asked whether an equality impact assessment had been carried out on the Budget. “Is it the case that the majority of those who earn under the personal allowance tax band are women and freezing it means that more women will be paying income tax for the first time?” she asked.

Lib Dem Treasury spokesperson Baroness Kramer suggested that freezing thresholds “is one of the worst ways to increase taxes on ordinary people”, adding that “by 2030-31, [people] will be paying some £1,400 more in tax. We will have had nine years of threshold freezing”. Furthermore, she asked why the government has not raised the digital services tax to 10%, claiming that “our own UK digital companies are disadvantaged by their [mega companies] gaming of the tax system”.

Criticising the freeze, Lord Razzall (Lib Dem) suggested that the government could instead tax the windfall profits of large banks, a suggestion that was echoed by his Lib Dem colleague, Lord Mohammed of Tinsley.

Lord Davies of Brixton (Lab) discussed the impact of the measure on pensioners, highlighting that he has been raising this issue since he entered the House five years ago. “Many pensioners [already] have larger than [the] standard level of pension, on which they are already having to pay tax,” he noted. “That is entirely right; I am in favour of pensioners paying tax. However, at the moment, because the state pension is not included within the PAYE system, it creates difficulties.” He noted that the government have not yet explained how their proposed remedy will work, and expressed fears, “because whenever a system is introduced as being a simplification, it all too often ends up making things a lot more complicated”.

“I, for one, celebrated when we were led to understand that income tax rates would be raised”, stated Lord Macpherson of Earl’s Court (Cross Bench), saying that that “could have addressed the issue of the growing number of people facing high, sometimes penal, marginal rates as child benefit, childcare support and the personal allowance are withdrawn”.

Responding to the debate, the minister, Lord Livermore, said the government’s distributional analysis shows tax, welfare and public service spending decisions taken from the autumn Budget 2024 onwards “are progressive and benefit households in the lowest income deciles the most.” He continued that the increases in tax are ‘concentrated’ on the highest-income households, adding on average, all but the richest 10% of households will ‘benefit’ from policy decisions in 2028-29.

On the impact of the Budget on women, the minister said that increases in the national minimum wage will benefit women more. He continued that, alongside the Finance Bill, impact assessments will be published in relation to each individual measure and their impacts on women.

In relation to the impact of tax thresholds on pensioners, he said: “We gave a clear commitment to this in the Budget. We are now exploring the best way to achieve it and will set out more details early next year.”

Taxation of property

The Lord Bishop of Manchester expressed concern about the council tax surcharge for high value properties, saying that, in many parts of London and the south-east, “location factors mean that even in a relatively poor parish, the vicarage will have a capital value over the £2 million threshold”. He continued that few parishes will be able to pay this additional tax, “nor can dioceses simply absorb the costs”. He urged the government to meet with church representatives to discuss how the existing tax exemptions applying to the residences of ministers of religion can be extended.

Lord Wood of Anfield (Lab) welcomed the surcharge, but he stressed the need to sort out through consultations issues such as “developing a system that is fair to those who are asset-rich and cash-poor, and the challenge of adding a tax system based on current prices of high-value homes on top of a council tax system that is still based on 1991 valuations.”

Meanwhile, another Labour peer, Baroness Campbell-Savours, called for council tax reform, saying: “We need to revisit the system and introduce new bandings…The government are proposing the use of cash thresholds, and I cannot quite understand why.”

Responding, Lord Livermore explained that the Valuation Office will identify homes which will need to pay the surcharge through a “targeted revaluation”.  He claimed that the new charge will ensure that those with the most valuable properties pay their ‘fair share’.

Salary sacrifice

Lord de Clifford (Cross bench) expressed concern for SMEs and skilled workers, and called on the government to take out pension payments from the change to the salary sacrifice scheme. He argued that the salary sacrifice change “will take a small amount of money away from individuals’ savings and their disposable income, as NIC will be charged on auto-enrolment at 5%, which they and employers cannot avoid”. He highlighted that the majority will be above the median salary in the UK and “it will bring an additional cost to SMEs employing skilled workers whose salaries are over £40,000.”

Likewise, Lord Hollick (Lab) believed that the reduction of tax-advantaged salary sacrifice to only £2,000 would reduce the level of savings and investment into the economy and ‘weaken’ pension security. He said: “Many of the measures have added to the complexity and unpredictability of our tax system”. A message that was echoed by Baroness Kramer for the Lib Dems.

On the contrary, Lord Davies welcomed the measure, stating that “private pensions get massive tax advantages”.

Responding, the minister said the salary sacrifice measures was proportionate, adding that the government “provide generous tax relief for people paying into a pension, relieving income tax on all contributions”. “This Budget makes no changes to those reliefs or to the tax-free lump sum,” he continued. “Salary sacrifice for pensions… is now forecast to nearly treble in cost from under £3 billion to £8 billion in 2030, with the most benefit going to higher earners.”

Wealth tax

Lord Sikka criticised the Budget’s approach to taxing wealth, saying that “just 1% of the population will continue to have more wealth than 70% of the population combined. That is utterly unfair.” Another Labour peer, Lord Pitkeathley of Camden Town, said “taxing wealth a little more like we tax work is not radical; it is overdue and fair.”

Baroness Jones of Moulsecoomb (Green) advocated for a wealth tax, saying her party “would introduce an annual wealth tax of 1% on assets over £10 million and 2% over £1 billion. This would raise at least £14.8 billion. We would also align rates of capital gains tax with income tax, and close loopholes.”

On the other hand, Conservative peers, including Lord Leigh of Hurley, Lord Hintze and Lord Elliot of Mickle Fell cautioned against taxing wealth creators, with Lord Elliot noting that, by leaving the country, these creators would “take two valuable things with them: tax revenue and jobs”.

Tax simplification and reforms

Lord Eatwell (Lab) quoted Adam Smith, who said “tax complexity is not only costly and damaging to enterprise but the cornerstone of tax avoidance and evasion”. He called for simplification and said that “the government, in pursuit of the growth objective, should establish now a commission on the simplification of business taxation”, a message that was echoed by Lord Hollick.

“If you talk to experts about tax… they will tell you that an ideal tax needs to have a clear purpose, be simple to understand and universal in its impact, raise a sufficiently large amount of money immediately to off-set the frictional costs of its introduction, and be progressive and fall more heavily on broader shoulders”, stated Lord Hodgson of Astley Abbotts (Con).

Former Treasury Permanent Secretary Lord Burns (Cross Bench) suggested that future Budgets should give much more attention to tax reform: “We need to iron out cliff-edge disincentives, widen the tax base and close down loopholes”.

Lord Wood noted that tax policy is “deeply political”. However, as the joint proposal from nine think tanks across the political spectrum recently argued, “there are many sensible structural tax reforms that all parties could endorse and that would increase fairness and revenue, such as addressing punitive marginal tax rates, reforming the VAT tax base, updating council tax valuations, and equalising tax rates on income from different sources”. He hoped that the government could set up work to address some of these in the remainder of this Parliament.

For the government, Lord Livermore recognised that the Budget had not “gone as far as” some peers would have liked, but, he said, “we have made a start on reforming some important tax reliefs within the system”.

Other issues

Lord Young of Cookham (Con), a former tax minister and a former transport secretary, welcomed the introduction of a per mile charge for electric vehicles, though he felt the government had misled him when it claimed to have ruled out any plans to introduce road pricing prior to the Budget. However he wanted them to go further, saying that they should have announced “a progressive move over time to road pricing for all vehicles based on a smarter charging system using existing telematics”. He continued: “By all means start with this crude pence-per-mile rate, but please do not rule out a more sophisticated system on wholly illusory grounds of invasion of privacy”.

Lord Brooke of Alverthorpe (Lab) and the Bishop of Manchester welcomed the increase in tax on online gambling. Additionally, Lord Brooke suggested looking into “unaddressed addiction of compulsive digital use”, saying: “We could tax digital features: those that are intentionally engineered to maximise compulsion. We could consider levies on the infinite scrolling in which so many people are now engaging”.

Baroness Moyo (Non-Affiliated) welcomed the Budget measures, such as encouraging ISAs to invest in equities as well as cash, and stamp duty holidays on newly listed companies. However, she believed “these measures will have a marginal, not transformational impact”. She added that “only a more holistic approach can be catalytic in driving investment”.

Lord Leigh said he was pleased that the government had listened to concerns raised by him and others on EIS and VCTs and lifted some of the size restrictions on those investments. “This is essential because there are real difficulties for UK companies trying to raise capital from UK investors right now.”

Lord Leigh also welcomed the changes to the low-value import customs duty relief, however he expressed disappointment that it will not come in until 2029. He questioned the rationale, saying he suspects the reason given by HMRC “is that it is all too complicated and difficult, but that is not acceptable”. He urged the government to see whether they can bring the legislation forward more quickly.

Responding to Lord Young, Lord Livermore said “we are not introducing road pricing, since electric VED does not mean that motorists will be charged based on when or where they drive, nor will there be any new national charges to drive on specific roads. Electric VED only requires a vehicle’s mileage to be estimated”.

Responding to Lord Leigh on low value imports, he said the government “will do what we can to speed up the implementation of the reforms, for which the noble Lord has called.”

The minister concluded the debate by saying that the government will continue to rebuild the economy after “14 years of failure from the party opposite”. He added: “This is a Budget that rejects austerity, a Budget for a stronger, more secure economy, and a Budget for a Britain built for all.”

You can read the full debate here.