1988 United Kingdom budget

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1988 United Kingdom budget

On 15 March 1988, Chancellor Nigel Lawson delivered the budget to the House of Commons. Known as the Giveaway Budget, it brought big tax cuts and several changes to how taxes and reliefs worked.

What changed

- Income tax: the 60% top rate was scrapped, so no one would pay more than 40% on earned income. The basic rate fell from 27% to 25%, with Lawson saying he planned to reduce it further to 20 in the future.
- Personal allowance: the amount you can earn before paying tax rose by 7.4%.
- Corporation tax: cut from 27% to 25% for smaller companies.
- Inheritance tax: simplified from four rates (30%–60%) to a single 40% rate; the threshold rose from £90,000 to £120,000.
- Mortgage relief: from August 1988, buyers could not claim multiple mortgage relief, ending some tax advantages for homebuyers.
- Capital Gains Tax: rates aligned with income tax; gains on assets bought before 1982 were written off.
- Excise duties: beer up by 1p a pint, wine up by 4p a bottle, and cigarettes up by 3p per pack; duties on spirits stayed the same.

Parliament and reaction

- The budget speech was loud and interrupted several times. Labour MPs questioned funding for the National Health Service, while Conservative MPs welcomed the tax cuts.
- The Deputy Speaker suspended proceedings briefly due to disorder in the House.

Immediate effects and context

- The budget boosted Lawson’s reputation and supported his belief that the economy could speed up by rearranging taxes. He also supported joining the Exchange Rate Mechanism (ERM), a stance at odds with Prime Minister Margaret Thatcher.
- In the short term, the economy began to boom in the late 1980s, driven by a rapid housing market rise and easy credit. House prices surged, and many people took out large mortgages.
- By late 1988, interest rates had risen, inflation increased, and the UK faced a large balance‑of‑payments deficit.
- Many first‑time buyers borrowed up to 95% of a home’s value, and when house prices fell in 1989 some faced negative equity. The early 1990s recession brought deficits and tax increases as the government tried to stabilise the economy.

Legacy

- The budget’s 40% Capital Gains Tax rate remained notable, though it would be cut to 18% for all taxpayers in the 2008 budget. The 1982 write‑off rule for asset ownership also remained in use for many years.
- Today some view the 1988 budget as controversial, while others see it as highly influential in shaping later economic policy.