The Autumn Budget is fast approaching, and speculation is building over which taxes chancellor Rachel Reeves will target to raise revenue and fill the estimated £22 billion government shortfall.
Could we see Labour break a key election pledge and raise income tax? What about scrapping pension salary sacrifice, cutting pensions tax-free cash, or overhauling property taxes?
While we will have to wait until Budget day on 26 November to find out about specific tax rises, Reeves gave us some clues about the Budget’s overall theme when she delivered a speech in Downing Street on 4 November.
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The chancellor pointed to a range of pressures - such as the ongoing threat of tariffs, persistent inflation, volatile global supply chains, high everyday costs and elevated government borrowing costs - and said she would make “important choices that will shape our economy for years to come”.
There were hints that the fiscal event could help bring down inflation, but that tax rises were necessary, for example to “protect our NHS and reduce our national debt”.
How could the Autumn Budget affect UK inflation?
There’s speculation the chancellor could scrap VAT on energy bills, which would give households struggling with the cost of living a bit of breathing space. It would also have the twin advantage of bringing down inflation.
Ruth Gregory, deputy chief UK economist at the consultancy Capital Economics, comments: “We think the Budget is more likely to lower inflation than raise it. The chancellor has suggested she will avoid raising taxes that directly boost inflation. Scrapping VAT on utilities would subtract 0.2 percentage points from CPI inflation for 12 months.
“And by weakening the economy, the fiscal tightening will pull down on inflation in the medium term.”
The consultancy forecasts that CPI inflation will fall from 3.8% in September to the Bank’s 2% target by the end of next year, and possibly below 2% in 2027.
John Wyn-Evans, head of market analysis at the wealth manager Rathbones, agrees that removing VAT from energy bills would ease inflationary pressures.
He adds: “Any offsetting tax rises - such as higher income taxes or further freezes to tax thresholds - could dampen household spending power, indirectly supporting the inflation downtrend. Overall, the Budget is unlikely to reignite inflation and may even help bring it down further if fiscal tightening outweighs any stimulative measures.”
According to Thomas Pugh, chief economist at tax and consulting firm RSM UK, Rachel Reeves’ speech earlier this week has given him “more confidence that this budget will be deflationary rather than a repeat of the stagflationary budget of last year”.
He comments: “It seems like the chancellor wants to avoid a repeat of last year’s policy-induced inflation. To do that she will have to focus on taxes like on income and property, and stay away from big increases in duties, employers’ National Insurance contributions (NICs) and VAT.”
How could the Autumn Budget affect UK interest rates?
Many people, especially first-time buyers and those remortgaging, will be hoping that the Bank of England will cut interest rates soon, and that mortgage rates will follow suit.
On 6 November, the Bank held rates at 4%, as widely expected. But, rates could be cut soon, depending on the contents of the Autumn Budget.
Wyn-Evans tells MoneyWeek: “With inflation cooling, the Bank of England will have more room to consider interest rate cuts. If the Budget is perceived as fiscally responsible - focusing on tax rises or spending restraint rather than giveaways - it could reinforce expectations of lower rates.
“However, any signs of fiscal slippage or overly optimistic growth assumptions could have the opposite effect, pushing up borrowing costs.”
Pugh notes that if the budget is as deflationary as the chancellor has hinted at, “it does raise the chances of a rate cut in December”.
Check out the next dates for Bank of England base rate meetings.
If inflation tumbles following the Autumn Budget, Capital Economics says “it may mean investors come round to our view that interest rates will fall from 4% now to 3% by the end of next year, rather than to the current low of 3.25-3.5% priced into the markets”.
On the other hand, Robert Salter, director of the accountancy firm Blick Rothenberg, says it’s not clear the Budget will lead to any drop in the base rate in the short term.
He tells MoneyWeek: “If Reeves were to raise any of the ‘sales-based taxes’ – particularly VAT, but also fuel duty or alcohol and tobacco duties - significantly in the Budget, those changes would actually feed through into inflation and potentially make it more difficult for the Bank of England’s monetary committee to reduce interest rates in the coming months.”
How could the Autumn Budget affect the UK economy?
Capital Economics is expecting a bumper Autumn Budget full of tax hikes worth about £38 billion, “which will trim GDP growth”.
Gregory says: “Such tax rises would be almost as big as Reeves’ first Budget when taxes rose by £41.5 billion. These two Budgets would be the biggest tax haul at successive major fiscal events since Denis Healey’s Budgets in 1974-1976.”
So, what does this mean for economic growth? Capital Economics suggests that the net fiscal tightening could reduce its GDP forecast by 0.3% in total, with 0.2% of that hit occurring in 2026.
“That’s unlikely to trigger a recession, but it might mean that instead of growing by 1.2% next year, GDP rises by 1%. The damage would be bigger if consumer confidence plunges, the policies hit households all at once, or if many minor taxes are raised rather than a few big ones,” explains Gregory.
The Office for Budget Responsibility is expected to downgrade long-term growth forecasts at the Budget due to weak productivity. The forecasts could fall from between 1.7% and 1.9% for annual GDP growth between 2026 and 2029 to a range of 1.2% to 1.4%, according to Capital Economics.
Salter points out a couple of ways the Budget could potentially affect economic growth.
He says the rumours in the long lead-up to the Budget are causing some companies to postpone business investment decisions and hiring additional staff. “Hopefully, however, these are only temporary blips and these decisions can come back ‘online’ once the Budget has been announced and employers actually have a clearer understanding of the government’s plans for both taxes and the wider economy.”
This, in turn, could boost UK growth.
On the flipside, the possible introduction of an “exit tax” – whereby wealthier taxpayers could be liable to a UK tax charge on unrealised capital assets if they become non-UK tax resident – has encouraged some wealthier taxpayers to leave the UK prior to the Budget in an attempt to avoid any such possible charge, says Salter.
“Those individuals who are doing this are often quite wealthy entrepreneurs and business owners. Hence, there is a real risk that if they do emigrate, they cease to continue investing in their UK business operations. Needless to say, any such developments would undermine the UK economy and the government’s stated goal of ‘going for growth’ from an economic perspective,” he points out.
What could the Autumn Budget mean for investors?
So, the Autumn Budget could potentially open the door to interest rate cuts, but may also act as a headwind for growth.
But, what does it mean for financial markets and for investors?
Wyn-Evans points out that the FTSE 100 is less sensitive to domestic policy, given its global earnings base, so may not be particularly impacted by the Budget.
“However, the pound, government bonds, and smaller UK-focused companies will react more directly. A credible Budget that reassures investors about the UK’s fiscal path could be a ‘clearing event’ for sentiment, potentially supporting equities and gilts,” he says.
“The gilt market has already shown signs of stability, and the UK’s debt-to-GDP ratio remains better than most G7 peers, which should help underpin investor confidence. Conversely, any policy missteps or political turmoil could unsettle markets.”
Pugh points out that gilt yields have recently fallen, “partially due to rumours that the Autumn Budget will be disinflationary this time”.
Gregory predicts that gilt yields and the pound are more likely to fall rather than rise after the Budget for three reasons.
“First, if the Budget weighs on GDP and inflation as we expect, that could reduce market interest rate expectations and weigh on gilt yields and sterling. Second, a bigger amount of headroom and a smaller budget deficit would be viewed positively by investors," she says.
“Third, immediate tax hikes would be more credible than spending cuts that look politically unachievable or are so far in the future that they are unlikely to materialise.”
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Pension tax-free lump sum warning as early withdrawal could cost savers £63,000Savers could also be hit with income tax on money added to cash savings accounts
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Reeves told scrapping pension salary sacrifice would cost average earner £377 a yearMPs – including chancellor Rachel Reeves – have received a letter warning of the dangers in reducing or removing salary sacrifice schemes for pension contributions, a plan under consideration by HMRC.
