UK October Budget 2024: Inflation, Taxes, and How to Protect Your Finances:

The real fright this Halloween came not from Trick or Treaters in the evening, but from Rachel Reeves budget announcement at lunchtime as she laid out Labour’s first budget in a generation. The United Kingdom’s tax burden is projected to reach record-breaking levels, with the tax-to-GDP ratio expected to climb to 38.2% by 2029–30, Rachel Reeves truly swung for the fences with this budget. If the £22 billion black hole left by the previous government is to be believed, it raises questions about what Rachel Reeves and her shadow cabinet colleagues were doing to scrutinize and challenge these figures while in opposition.

While the budget included promises to avoid further tax increases this parliament, history suggests politicians often find ways to sidestep such commitments. It likely won’t be a surprise if we were to see a further tax hike for those individuals in the top tax rates —a "mere penny" they will claim—though the reality is far from trivial for those already paying the lion's share.

Currently, the top 10% of UK earners—those making over £60,000 annually—already shoulder over 60% of the income tax collected by the Treasury. This group includes not only the ultra-wealthy but also professionals and middle-income families, who now find themselves disproportionately burdened. Far from luxury lifestyles, these earners are bearing a weight that is steadily increasing, compounded by higher levies on dividends, capital gains, and property transactions. This growing reliance on top earners aligns with broader shifts in recent budgets, where substantial tax increases and elevated public spending aim to address pressing economic challenges. While this strategy seeks to bolster social programs, the reliance on higher taxation of the top income brackets raises concerns about sustainability, fairness, and the potential long-term economic consequences.

Historically, the UK’s tax burden has ebbed and flowed, but today’s trajectory suggests a nation edging toward unprecedented fiscal pressures. This approach doesn’t just tax finances—it taxes aspirations, discouraging ambition, innovation, and upward mobility. At a time when economic growth is critical to addressing surging national debts worldwide, pulling these levers risks undermining the very engines of progress we so desperately need. Unfortunately the effects of elevated taxes and increased public spending are not confined to government balance sheets—they ripple through the economy and land squarely on households. For individuals, these measures intertwine with inflation and interest rate policies, creating a complex web of financial pressures.  

How Do Elevated Taxes & Planned Public Spending Impact the Individual?

Reflections on Interest Rates: A Year of False Hope

Last Christmas, I genuinely believed we’d finally reached the end of having to tighten our belts. Inflation felt like it was slowing, and I was optimistic that the Bank of England (BoE) would start cutting interest rates steadily throughout 2024. Fast forward to November, and the reality has been far less comforting. Despite two modest rate cuts—one in August and another just last month—the base rate still sits at 4.75%. Hardly the respite many of us were hoping for. The path of rate hikes from 2023 into 2024 has been relentless, and while there’s been a slight easing, it’s not enough to reverse the financial strain households are facing. Mortgages, car loans, and day-to-day borrowing remain stubbornly expensive, and we’re all still feeling the pinch. Here’s what the Bank of England base rate has looked like over the last two years:

Interest Rates and Borrowing Costs Even with the recent rate cuts, fixed-rate mortgages at an 80% loan-to-value (LTV) ratio in the UK remain stubbornly high. A quick check in mid-November reveals that many major lenders have increased their fixed mortgage rates despite the BoE’s base rate reduction. For households, this means no relief in sight for one of their most significant financial burdens. But why is this happening? This leads us directly to the issue of inflation.

The Inflation Issue: What’s Driving These Persistent Pressures?

Despite hopes that inflation would subside by now, it remains stubbornly high—and the October budget only adds fuel to the fire. The planned ramp-up in public spending, coupled with elevated taxes, creates an environment that puts upward pressure on prices. Let’s explore the key drivers and their implications:

Public Spending and Demand

Increased public spending is intended to address economic challenges and support critical sectors, such as infrastructure and public services. However, injecting significant funds into the economy risks overheating demand, particularly when supply chains remain constrained. When demand outpaces supply, prices naturally rise, prolonging inflation.

Bank of England’s Balancing Act

The BoE is walking a tightrope, trying to balance price stability with economic growth. While rate cuts are necessary to ease borrowing costs and stimulate growth, too much loosening risks reigniting inflationary pressures. This caution explains why even modest base rate reductions haven’t translated into lower mortgage or loan rates, as lenders hedge against inflationary risks.

The Wage-Price Spiral

Wage stagnation, coupled with rising living costs, creates a vicious cycle. Efforts to align public sector wages with inflation often prompt similar demands in the private sector. Businesses, in turn, pass on higher wage costs to consumers through increased prices, fueling inflation further. This feedback loop makes breaking the cycle particularly challenging.

Inflation Expectations

High inflation expectations perpetuate the problem. When workers anticipate rising costs, they push for higher wages, and businesses preemptively adjust prices to maintain margins. This entrenches inflation, making it harder to control. The longer inflation remains elevated, the more difficult it becomes to shift these behaviors.  

What Does All This Mean for You & Your Household?

A Challenging Road Ahead

The October budget signals a prolonged period of high inflation and constrained financial conditions. While planned public spending is necessary in some areas, it risks keeping borrowing costs elevated and inflation entrenched, further squeezing household budgets.

Warren Buffett's famous saying, "You only find out who is swimming naked when the tide goes out," serves as a powerful metaphor for financial resilience. In times of economic expansion and low interest rates, excessive borrowing and risk-taking often go unnoticed. However, when the tide turns—through rising rates or economic downturns—those who are over-leveraged are exposed.

Mortgages: Fixed-rate mortgages remain stubbornly high as lenders factor in prolonged inflationary pressures and higher capital costs. For those with fixed-rate deals ending soon, the jump to current market rates could result in significant increases in monthly repayments—often hundreds of pounds extra each month. This "rate shock" is forcing many homeowners to reassess budgets or explore refinancing options.

Car Loans: Financing a car has become more expensive as lenders adjust to rising base rates and inflationary risks. Higher monthly repayments on car loans mean households may have to delay upgrading vehicles or opt for longer-term loans, which increase the overall cost of ownership. This creates additional pressure on disposable income, especially for families reliant on cars for commuting or work.

Essential Goods: Food, energy, and transportation costs are rising faster than wages, leaving families with less disposable income to cover non-essential items or build savings. For example, grocery bills have risen sharply due to supply chain disruptions and energy costs, while rising fuel prices make every day commutes costlier. These increases disproportionately affect lower-income households, for whom essentials make up a larger share of expenditure.

Savings Erosion: Inflation continues to erode the real value of savings, making it harder to plan. Even with higher interest rates on savings accounts, the returns often fail to keep pace with inflation, meaning savers are effectively losing purchasing power. This has prompted many to explore alternative options like ISAs or investments, though these come with their own risks and complexities.  

Practical Steps to Protect Your Finances in 2025

As the UK navigates these challenges, avoiding excessive leverage and building financial resilience have never been more important. Here are some first steps to consider: 

Reassess Debt Levels: Make sure your debt is manageable under current and potentially higher interest rates.

Build an Emergency Fund: Ensure you have a financial buffer to weather unexpected economic shocks.

Seek Stability: Consider refinancing to lock in predictable repayment terms and protect yourself against further rate hikes, this is double edged as it can go either way.

Leverage Tax-Efficient Tools: Utilise ISAs and other tax-efficient investment options to reduce your tax burden and maximise savings.

Conclusion

So, ask yourself, were you swimming naked, or have you been proactive enough to financially suit up? After the economic storms of the past few years, you probably already know the answer. If you still feel the water rushing past, now is the time to act.

If you’ve been following the 10 introductory blogs, you’ve already touched on some of these strategies. In the upcoming series, we’ll dive deeper into the tools available: ISAs & their types, NS&I bonds and SIPPs, exploring the last tax-efficient tools available to individuals.

For those who’ve weathered the financial pressures of recent years and still have some extra funds to invest, these tools could be game changers. By leveraging the tools available in the UK, you can protect what you have, secure your finances, and work toward a brighter financial future.