Distributional impact of tax and welfare policies: Budget 2025

In this Special Article we analyse the distributional impact of Budget 2025. Similar to last year, many reforms in this Budget were temporary measures specifically aimed at combatting cost of living pressures. Compared to a baseline pegged to wage growth, the permanent measures, such as increases in the tax band, tax credits and social welfare rates, are broadly progressive, with households in the bottom quintile of income expected to see an increase of around 0.9% of equivalised disposable income, and those in the top quintile to see increases of 0.5%. When accounting for temporary measures, the average household is estimated to see an increase of just 0.2% in their equivalised disposable income, and the broadly progressive effect of the permanent measures becomes less clear. These results are driven by the fact that many temporary measures have either been frozen (and therefore reduced in real terms) or have been explicitly reduced, such as the reduction in energy credits. We show that from 2020 to 2025 permanent changes to the tax and welfare system have resulted in small average income losses (-0.3% of disposable income) compared to policy changes pegged to wage growth. While temporary measures have been successful in helping households deal with rising prices, their inevitable phasing out will cause issues if headline welfare payments fail to keep pace with income growth. We also find that households with children tended to benefit more from the Budget 2025 measures, such as the double Child Benefit payment, but that the measures have little anticipated downward effect on child poverty rates, suggesting a targeting issue.