Rachel Reeves’ 2025 Budget has been billed as a tax big, spend big moment for the new Labour government – higher welfare, higher tax and a record tax burden by the end of the decade. Behind the political noise, the numbers matter far more than the soundbites, especially for construction.
For contractors, developers and consultants working in London, this Budget sets the direction of travel on three fronts:
For contractors, developers and consultants working in London, this Budget sets the direction of travel on three fronts:
- Household spending power and housing demand
- Labour and business costs
- The investment climate for property, infrastructure and net zero
Record Tax Burden, Weak Income Growth – a Tough Consumer Backdrop
According to the Office for Budget Responsibility (OBR), the tax take is forecast to rise to around 38% of national income by 2030–31, the highest level on record. This is driven by a package of measures expected to raise about £26bn a year by 2029–30. The largest single contributor is the decision to freeze personal tax thresholds, which alone accounts for around £8bn of the extra revenue by 2029–30.
The Institute for Fiscal Studies (IFS) describes the outlook for household spending power as truly dismal:
Residential demand will stay fragile. Stagnant real incomes and higher effective tax on pay rises will keep a lid on discretionary spending, including house moves and upgrades. For London’s private housing market, particularly in the mid-market, this means buyers remain price-sensitive and schemes need sharper value propositions and phasing.
Refurbishment and retrofit remain more attractive than new build for many households. With moving costs and taxes rising, households that can invest may favour extensions, energy upgrades and internal reconfiguration rather than trading up, good news for contractors focused on refurbishment and RMI work.
Developers face a cautious consumer but not a collapse. The Budget avoids shock measures on mortgage interest or SDLT; instead, pressure comes from slow real wage growth and a heavier overall tax drag. Demand will likely be patchy rather than falling off a cliff.
According to the Office for Budget Responsibility (OBR), the tax take is forecast to rise to around 38% of national income by 2030–31, the highest level on record. This is driven by a package of measures expected to raise about £26bn a year by 2029–30. The largest single contributor is the decision to freeze personal tax thresholds, which alone accounts for around £8bn of the extra revenue by 2029–30.
The Institute for Fiscal Studies (IFS) describes the outlook for household spending power as truly dismal:
- Average disposable income is forecast to grow by only 0.5% a year over the next five years, compared with more than 2% annually from the mid-1980s to mid-2000s.
- Between 2028 and 2031, an additional 700,000 people start paying income tax and around one million are pulled into higher-rate tax because of the frozen thresholds.
Residential demand will stay fragile. Stagnant real incomes and higher effective tax on pay rises will keep a lid on discretionary spending, including house moves and upgrades. For London’s private housing market, particularly in the mid-market, this means buyers remain price-sensitive and schemes need sharper value propositions and phasing.
Refurbishment and retrofit remain more attractive than new build for many households. With moving costs and taxes rising, households that can invest may favour extensions, energy upgrades and internal reconfiguration rather than trading up, good news for contractors focused on refurbishment and RMI work.
Developers face a cautious consumer but not a collapse. The Budget avoids shock measures on mortgage interest or SDLT; instead, pressure comes from slow real wage growth and a heavier overall tax drag. Demand will likely be patchy rather than falling off a cliff.
Freezing Tax Thresholds vs Minimum Wage Rises – Labour Cost Dynamics
One of the most important Budget interactions for construction is the combination of:
Implications for contractors and consultants
Site labour costs will rise. Directly employed labour and some agency labour will feel the immediate impact of the minimum wage uplift. For London (where many roles already sit above minimum wage but not far beyond) wage expectations across trades are likely to ratchet up.
Net pay doesn’t rise as much as headline rates. Because tax bands are frozen, the benefit of future pay rises is diluted for workers. That can create ongoing pressure for further wage demands, especially in London where living costs are highest.
Professional staff are dragged into higher bands. Engineers, QSs, project managers and commercial leads in the £50k–£80k range are more likely to be paying higher-rate tax in a few years without feeling richer in real terms. That affects retention, salary negotiations and the attractiveness of UK-based roles versus overseas opportunities.
For London firms already struggling to recruit and retain skilled people, this Budget bakes in a period of structurally higher employment costs with muted take-home gains for staff.
One of the most important Budget interactions for construction is the combination of:
- Frozen income tax thresholds until 2031 (previously due to end in 2028)
- A higher minimum wage, rising to £12.71/hour for over-21s from April, and £10.85 for 18–20-year-olds.
Implications for contractors and consultants
Site labour costs will rise. Directly employed labour and some agency labour will feel the immediate impact of the minimum wage uplift. For London (where many roles already sit above minimum wage but not far beyond) wage expectations across trades are likely to ratchet up.
Net pay doesn’t rise as much as headline rates. Because tax bands are frozen, the benefit of future pay rises is diluted for workers. That can create ongoing pressure for further wage demands, especially in London where living costs are highest.
Professional staff are dragged into higher bands. Engineers, QSs, project managers and commercial leads in the £50k–£80k range are more likely to be paying higher-rate tax in a few years without feeling richer in real terms. That affects retention, salary negotiations and the attractiveness of UK-based roles versus overseas opportunities.
For London firms already struggling to recruit and retain skilled people, this Budget bakes in a period of structurally higher employment costs with muted take-home gains for staff.
Welfare Expansion and Energy Support – Indirect Effects on Construction
The Budget channels a large share of new tax revenue into welfare and cost-of-living measures, including:
What this means on the ground
More stability for lower-income households. For London’s social housing and affordable housing sectors, the extra support should help reduce rent arrears pressure and stabilise some of the worst cost-of-living stress, supporting viability of long-term maintenance and retrofit programmes.
Energy efficiency and infrastructure still a medium-term story. While the cut in bills is welcome for households, it doesn’t remove the need for large-scale investment in grid upgrades, generation and building energy performance. In the medium term, this should continue to generate work for contractors and consultants involved in decarbonisation, but the Budget itself doesn’t announce a major new capital push, it mainly reshuffles how existing costs are funded.
The Budget channels a large share of new tax revenue into welfare and cost-of-living measures, including:
- Scrapping the two-child benefit cap, expected to lift around 450,000 children out of relative low income by the end of the Parliament.
- A £150 annual reduction in typical household energy bills from April, achieved by removing some policy costs from bills and funding them via general taxation instead.
What this means on the ground
More stability for lower-income households. For London’s social housing and affordable housing sectors, the extra support should help reduce rent arrears pressure and stabilise some of the worst cost-of-living stress, supporting viability of long-term maintenance and retrofit programmes.
Energy efficiency and infrastructure still a medium-term story. While the cut in bills is welcome for households, it doesn’t remove the need for large-scale investment in grid upgrades, generation and building energy performance. In the medium term, this should continue to generate work for contractors and consultants involved in decarbonisation, but the Budget itself doesn’t announce a major new capital push, it mainly reshuffles how existing costs are funded.
Property and Mansion Tax: London in the Crosshairs
One of the most London-specific measures is the new annual property charge (dubbed a “mansion tax”) on homes worth over £2m in England from April 2028:
Impact on prime London residential and development
Prime central London is disproportionately affected. A large share of homes above £2m are in inner London boroughs. For high-end resi developers and prime refurb contractors, this charge becomes another running cost factored into buyers’ affordability calculations.
Might tilt behaviour towards smaller footprints and energy efficiency. Buyers of £2m+ homes may lean harder on value engineering, energy performance and long-term operating costs to offset the new annual tax. That supports demand for high-spec retrofit and performance-led design.
Potential drag on transaction volumes at the top end. An additional annual charge can encourage hold and sweat the asset or renting strategies rather than trading frequently. For consultants reliant on high churn in the £2m+ market (architects, interior specialists), this could dampen volumes, but create more deep retrofit, remodelling and change-of-use projects.
For mid-market developers, the indirect risk is that policy focus on taxing property wealth grows, with further interventions possible later in the Parliament.
One of the most London-specific measures is the new annual property charge (dubbed a “mansion tax”) on homes worth over £2m in England from April 2028:
- £2,500 a year for properties valued above £2m
- Rising to £7,500 a year for properties above £5m
Impact on prime London residential and development
Prime central London is disproportionately affected. A large share of homes above £2m are in inner London boroughs. For high-end resi developers and prime refurb contractors, this charge becomes another running cost factored into buyers’ affordability calculations.
Might tilt behaviour towards smaller footprints and energy efficiency. Buyers of £2m+ homes may lean harder on value engineering, energy performance and long-term operating costs to offset the new annual tax. That supports demand for high-spec retrofit and performance-led design.
Potential drag on transaction volumes at the top end. An additional annual charge can encourage hold and sweat the asset or renting strategies rather than trading frequently. For consultants reliant on high churn in the £2m+ market (architects, interior specialists), this could dampen volumes, but create more deep retrofit, remodelling and change-of-use projects.
For mid-market developers, the indirect risk is that policy focus on taxing property wealth grows, with further interventions possible later in the Parliament.
Transport and Mobility: EV Road Pricing and Rail Fare Freeze
Two transport-related decisions intersect with construction:
Two transport-related decisions intersect with construction:
EV road pricing from 2028
Construction-specific angles
EV road pricing sends a signal on future fleet economics. For contractors investing in electric vans, cars and site logistics, road pricing will gradually become part of whole-life cost calculations. The longer lead-time to 2028 gives time to plan fleet transitions and charging infrastructure.
Rail fare freeze supports commuter patterns. Keeping season ticket costs flat for a few years helps workers commuting into London from surrounding areas. That supports labour mobility and may make central London employment slightly more attractive versus fully remote roles, indirectly benefiting city-centre office and mixed-use schemes that rely on footfall.
- 3p per mile for fully electric vehicles
- 1.5p per mile for plug-in hybrids
Construction-specific angles
EV road pricing sends a signal on future fleet economics. For contractors investing in electric vans, cars and site logistics, road pricing will gradually become part of whole-life cost calculations. The longer lead-time to 2028 gives time to plan fleet transitions and charging infrastructure.
Rail fare freeze supports commuter patterns. Keeping season ticket costs flat for a few years helps workers commuting into London from surrounding areas. That supports labour mobility and may make central London employment slightly more attractive versus fully remote roles, indirectly benefiting city-centre office and mixed-use schemes that rely on footfall.
Universities, International Students and the London Construction Talent Pipeline
The Budget outlines a planned annual charge on universities in England for each international student enrolled (after an allowance for the first 220 students), with a consultation due and implementation targeted from 2028. Early estimates suggest this could remove hundreds of millions of pounds from the sector’s net income.
Why this matters for construction
The Budget outlines a planned annual charge on universities in England for each international student enrolled (after an allowance for the first 220 students), with a consultation due and implementation targeted from 2028. Early estimates suggest this could remove hundreds of millions of pounds from the sector’s net income.
Why this matters for construction
London’s built environment sector is heavily reliant on graduates from UK universities – including international students who stay to work as engineers, architects, QSs and project managers.
If the new charge reduces international enrolments or squeezes university finances, it could constrain STEM and built-environment course capacity, feeding into future skills shortages.
Capital programmes in the university estate (new buildings, labs, student accommodation) may also be affected if institutions face tighter budgets.
For London construction, this is a medium-term strategic risk: fewer skilled graduates entering the pipeline just as large retrofit, infrastructure and housing programmes demand more technical expertise.
Headroom, Stability and the Pipeline of Public Work
A key technical outcome of the Budget is that Reeves roughly doubles her headroom against the fiscal rules to around £22bn in five years’ time, compared with about £10bn previously. That’s achieved by raising both taxes and spending but ensuring that, on current forecasts, the government still moves towards a modest budget surplus.
For the construction industry, this matters because:
More headroom reduces the risk of sudden, panicked cuts to capital programmes if forecasts deteriorate slightly.
It signals a preference for stability rather than frequent course-corrections – the OBR will now only fully assess the rules once a year, not twice, which should calm constant speculation about infrastructure cuts or surprise tax changes.
However, it also means limited scope for big new capital announcements without new taxes or spending cuts elsewhere. Don’t expect a surge of new, unfunded megaprojects.
In practice, that suggests a steady but unspectacular pipeline maintaining key transport, health, education and housing programmes, with more emphasis on efficiency, retrofit and targeted upgrades than on grand, brand-new schemes.
A key technical outcome of the Budget is that Reeves roughly doubles her headroom against the fiscal rules to around £22bn in five years’ time, compared with about £10bn previously. That’s achieved by raising both taxes and spending but ensuring that, on current forecasts, the government still moves towards a modest budget surplus.
For the construction industry, this matters because:
More headroom reduces the risk of sudden, panicked cuts to capital programmes if forecasts deteriorate slightly.
It signals a preference for stability rather than frequent course-corrections – the OBR will now only fully assess the rules once a year, not twice, which should calm constant speculation about infrastructure cuts or surprise tax changes.
However, it also means limited scope for big new capital announcements without new taxes or spending cuts elsewhere. Don’t expect a surge of new, unfunded megaprojects.
In practice, that suggests a steady but unspectacular pipeline maintaining key transport, health, education and housing programmes, with more emphasis on efficiency, retrofit and targeted upgrades than on grand, brand-new schemes.
What London’s Construction Sector Should Do Now
Pulling it all together, the 2025 Budget creates a landscape of high taxes, constrained household incomes, modest giveaways and a focus on welfare and stability rather than growth fireworks.
For London’s construction ecosystem, the strategic responses are clear:
Double down on retrofit, efficiency and value engineering. Households and institutions will be under ongoing cost pressure; propositions that cut running costs and improve performance will win.
Plan for rising labour costs and invest in productivity. With wages moving up and tax drag biting, productivity gains via better planning, digital tools and MMC will be essential to protect margins.
Target segments that benefit from welfare and policy changes. Social housing, affordable housing, education, healthcare and energy-related projects are likely to see more stable funding than discretionary private schemes.
Watch the prime London resi market closely. The mansion tax and frozen thresholds will reshape the economics of high-end property ownership from 2028 onwards – impacting demand for luxury new builds versus deep retrofit.
Engage early on EV, road-pricing and university reforms. Contractors with large fleets and firms reliant on graduate recruitment should feed into consultations and start scenario-planning now.
This Budget does not transform the construction landscape overnight. But it locks in a direction of travel: higher taxation, slower income growth, and a state more willing to spend on welfare than on dramatic new capital commitments.
For London’s contractors, developers and consultants, success over the rest of this decade will depend on reading that direction early and positioning businesses where the money, and the long-term demand, will actually be.
Pulling it all together, the 2025 Budget creates a landscape of high taxes, constrained household incomes, modest giveaways and a focus on welfare and stability rather than growth fireworks.
For London’s construction ecosystem, the strategic responses are clear:
Double down on retrofit, efficiency and value engineering. Households and institutions will be under ongoing cost pressure; propositions that cut running costs and improve performance will win.
Plan for rising labour costs and invest in productivity. With wages moving up and tax drag biting, productivity gains via better planning, digital tools and MMC will be essential to protect margins.
Target segments that benefit from welfare and policy changes. Social housing, affordable housing, education, healthcare and energy-related projects are likely to see more stable funding than discretionary private schemes.
Watch the prime London resi market closely. The mansion tax and frozen thresholds will reshape the economics of high-end property ownership from 2028 onwards – impacting demand for luxury new builds versus deep retrofit.
Engage early on EV, road-pricing and university reforms. Contractors with large fleets and firms reliant on graduate recruitment should feed into consultations and start scenario-planning now.
This Budget does not transform the construction landscape overnight. But it locks in a direction of travel: higher taxation, slower income growth, and a state more willing to spend on welfare than on dramatic new capital commitments.
For London’s contractors, developers and consultants, success over the rest of this decade will depend on reading that direction early and positioning businesses where the money, and the long-term demand, will actually be.
