Daniel Hilton
Higher taxes on the wealthy will be “part of the story” in chancellor Rachel Reeves’ second Budget, she has said. With just a few weeks to go until she stands up at the dispatch box on 26 November, speculation is mounting about what that will mean for millions of taxpayers.
Many experts predict tax hikes and spending cuts are almost inevitable in the Autumn Budget. Higher taxes on pensions, more capital gains tax on property, further tightening of inheritance tax rules, and the potential for more tax to be brought in by frozen income tax thresholds are all rumoured to be on the table.
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Which taxes could go up?
If the government sticks to its promise not to raise the three main working taxes – National Insurance, income tax and VAT – Reeves will need to look for other areas that remain untapped.
1. Extending the tax threshold freeze
The chancellor could go back on her decision to end the freeze on personal tax thresholds, for example by extending the deadline from 2028 to 2030. Speculation has been rising in this area. Reeves refused to rule it out when quizzed at the Labour party conference. But this would be both very unpopular and not raise any more in funds for the Treasury for at least another three years.
The Fabian Society, an influential Labour think tank, has urged the chancellor to make such a move to drum up much-needed cash.
Extending the freeze to 2030 could mean high earners find themselves paying thousands more in income tax compared to 2022, when thresholds were first frozen, according to calculations by Rathbones.
Someone who earned £100,000 in 2022 could pay £7,000 more in tax than if thresholds had kept pace with inflation. The additional tax burden would be £5,600 for someone on £80,000, and £4,600 for someone on £50,000.
The figures assume wage growth in line with the Office for Budget Responsibility’s data and forecasts, and 2% inflation in 2030.
2. Salary sacrifice
Salary sacrifice arrangements could face the chop. Under current rules, employees can give up a slice of their pay in exchange for a benefit, such as a pension contribution. It is a tax-efficient arrangement, because it means you pay less income tax, and both you and your employer pay less National Insurance.
In May, an HMRC report was published looking into the possible outcome of changing the rules. The report was commissioned by the previous government in 2023, but it has raised fears that existing tax reliefs could be scaled back.
“It would be surprising if no one in government was looking at this report,” said Gary Smith, financial planning partner at Evelyn Partners.
3. Pensions
A significant tax hit is already looming for pensions, which will be brought inside the IHT net from April 2027. Reeves may be reluctant to hammer them with further changes as a result, particularly given that the government wants to use pension assets as an engine for growth.
That said, every time money needs to be raised, there is speculation about whether the government will trim pension tax relief or pension tax-free cash.
Some have previously suggested introducing a flat rate of pension tax relief so that all taxpayers get the same. It is currently received at your marginal rate.
Scrapping or reducing the tax-free cash allowance is also rumoured to be under consideration by Reeves.
4. Investments
Reeves hiked CGT rates at the last Budget, but that doesn’t mean they won’t be in focus this time around.
A report in The Guardian claimed the Treasury is considering increasing rates by “a few percentage points”. This would supposedly be accompanied by some kind of CGT allowance for investors who put money into British businesses, as the government seeks to revive UK markets.
Dividends are a less likely target. “Dividend tax was mentioned in the leaked memo which Angela Rayner submitted to the Treasury in March, but this has already been squeezed significantly in recent years,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.
Dividend tax rates were raised in April 2022, and then the tax-free allowance was slashed from £2,000 in April 2023 to just £500 today. “Given how attractive the UK market is for investors seeking dividends, it would be counterintuitive [to tighten the rules further]”, said Coles.
5. Inheritance tax
IHT was a significant focus in the last Budget, with new measures impacting farms, family businesses and pension pots. The freeze on the tax-free allowances (known as the nil-rate bands) was also extended until 2030, leaving estates exposed to fiscal drag.
Further measures could be on the cards this year. Sources told The Guardian that the Treasury is considering tightening up gifting rules. This could involve introducing a cap on the total value of lifetime gifts or changing the rules on taper relief (also known as the seven year rule).
“Introducing a lifetime cap would be a significant departure from current policy,” said Rachael Griffin, tax and financial planning expert at wealth management firm Quilter.
“The UK has never had such a limit, and if it were set too low it could affect a large number of middle-class estates, particularly in areas where property wealth alone can easily breach frozen thresholds.”
6. Property taxes
A possible replacement of stamp duty with a new levy on the sale of properties worth more than £500,000 has been rumoured.
A report from the think tank Onward proposed an annual rate of 0.54% for properties worth between £500,000 and £1 million, and 0.81% on values above that. While the rate proposed by Onward is annual, the amount would only be payable after a sale.
The Treasury is supposedly also thinking about replacing council tax with a new local property tax in an attempt to boost struggling local authorities. Bills could be based on the value of the property, amid concerns existing council tax bands are out of date. Though implementing this may require a second Labour term.
Another area Reeves is said to be considering is CGT on main residences, if they are worth more than a certain threshold. Under current rules, CGT is only charged on the sale of second homes. The Times said a theoretical threshold of £1.5 million would hit around 120,000 homeowners who are higher-rate taxpayers with CGT bills of almost £200,000.
Finally, landlords could also be in the Treasury’s line of sight. Labour insiders supposedly told The Times that officials are considering charging National Insurance on property income in the hope of raising £2 billion.
7. Wealth tax
A wealth tax is another area of speculation, but would be seen as an extreme move.
A wealth tax is effectively a levy on an individual’s total wealth rather than just their income. It could be applied as a percentage payable by individuals with assets over a certain level. Campaigners have previously suggested a 2% wealth tax for individuals with wealth over £10 million.
“It is difficult to make the case that an annual tax on wealth would be a sensible part of the tax system even in principle,” said Stuart Adam, senior economist at the Institute for Fiscal Studies. “Taxing the same wealth every year would penalise saving and investment.” It would also be extremely difficult to implement and administer.
One alternative would be to revisit existing taxes on wealth, such as CGT and IHT. In the past, rumours have focused on the potential for a ‘double death tax’ where CGT is applied on top of IHT when assets are passed on at death.
8. Business taxes
The government has promised not to raise corporation tax above its current level of 25% for the duration of this Parliament. However, businesses could be impacted in other ways.
At last year’s Budget, the government said it would reform business rates to boost struggling high streets. Reeves promised to introduce lower rates for retail, hospitality and leisure properties, paid for by increasing rates for more valuable properties (those with rateable values above £500,000). The government is due to give an update at this year’s Budget.
The British Retail Consortium (BRC), a trade association, has praised the chancellor’s plans to cut rates for retail, hospitality and leisure properties, but suggests 400 large stores could close if forced into a higher tax band, potentially resulting in 100,000 jobs lost. Aldi UK, the supermarket chain, has also warned that any measures which increase costs for businesses could result in higher food prices.
9. Tax on limited liability partnerships
Reeves is considering a £2 billion tax crackdown on lawyers, doctors and accountants by targeting the limited liability partnerships (LLPs) they often use to pay themselves, according to the Times.
More than 190,000 people use these types of partnerships because they provide a tax saving, centring around National Insurance Contributions.
Currently LLP partners are classed as self-employed, so they do not pay employer National Insurance, normally 15%, and pay a lower rate of employee NI (typically 6% on profits over £12,570 up to £50,270 and 2% on profits over £50,270).
Reeves is said to view this situation as an unfair tax break for the wealthy, as many of those who use LLPs are high earners, and is considering plans to make LLPs subject to employer’s National Insurance.
Someone in a partnership earning £316,000 (the average for a solicitor partner) would pay an extra £23,000 in tax – equivalent to an average tax rate of 7.3% – under the proposals, calculations by economists have suggested.
10. Income tax hikes
Reeves is reportedly considering raising income tax in what would be a break of a major Labour manifesto pledge. There are conflicting reports of how any hikes might manifest.
The Telegraph reports the chancellor could announce a 2p increase to income tax and a 2p cut to National Insurance (NI).
Think tank the Resolution Foundation said this would bring in an estimated £6 billion. It would mean landlords, taxpaying pensioners and the self-employed are hit with a larger tax bill as they don’t pay NI.
Other reports suggest Reeves could increase income tax by 1p across the board.
According to calculations by AJ Bell, this means someone earning £35,000 a year would see their annual income tax bill rise from £4,486 to £4,710 – a hike of £224.
Should you act on Budget rumours?
Rumours can incite panic but it is important to stay calm and avoid knee-jerk reactions that can leave you worse off over the long run.
Last year, Reeves was widely expected to cut the amount of tax-free cash retirees could take from their pension – a rumour which prompted many to access their pension pot earlier than previously planned. The policy never materialised and some savers were left with regret. Leaving the money invested for longer could have allowed their tax-free lump sum to grow further.
That said, there are some sensible steps you can take as part of your ongoing financial planning to guard against Budget changes:
- Tax-efficient investing: If you want to invest and are looking to protect yourself from CGT and dividend tax, Coles says using a stocks and shares ISA is a “no-regrets move”. If you already have investments but hold them outside of an ISA, moving them inside a tax-efficient wrapper is also a good idea. This process is known as a ‘Bed and ISA’ transfer.
- Cash ISA: You can use a cash ISA to avoid a tax bill on your savings interest. Basic-rate taxpayers become liable for tax as soon as they earn £1,000 in savings interest. Higher-rate taxpayers can earn just £500, and additional-rate taxpayers have no allowance at all.
- Boost your pension: Boosting your pension contributions is almost always a good idea, as a pension is one of the most tax-efficient ways to save.
- Salary sacrifice: Salary sacrifice allows you to swap a portion of your salary for a benefit, such as a pension contribution, and helps both you and your employer pay less tax. For higher earners who would otherwise lose means-tested payments like Child Benefit, it reduces their take-home pay without actually leaving you worse off overall.
- Lifetime gifts: Under current rules, to avoid paying IHT you need to outlive the gift by seven years. Alternatively, regular gifts made out of surplus income become tax-free immediately. For example, you could contribute a regular amount to a grandchild’s junior ISA. To qualify, these gifts cannot be made from capital (i.e. savings or the sale of assets) and must not compromise your standard of living.
What is Rachel Reeves having to contend with ahead of the Autumn Budget?
It is no secret that the UK is in a tough economic position. GDP growth has been sluggish since before the pandemic.
The most recent GDP data shows that month-on-month economic growth was just 0.1% in August, while new forecasts by the IMF believe the UK economy will grow by 1.3% in both 2025 and 2026.
Meanwhile, inflation has remained stubbornly high since 2021, with the latest data showing price growth was 3.8% in September – the same as August and the highest since January 2024, though below predictions of a rise to 4%. Forecasts by the IMF also expect UK inflation to be the highest among the G7 for this year and next.
The cost of borrowing also hit the highest level since 1998 in September, with 30-year gilt yields peaking at more than 5.7%, in-part due to concerns about tax rises in the UK and the state of the public finances.
They have since fallen back slightly to around 5.34%. Public sector borrowing also ballooned in August, hitting the highest level for the month in five years.
Amid this economic backdrop, research published by the Institute for Fiscal Studies (IFS) suggests Reeves will have to fill a £22 billion hole in the public finances at the Budget just to keep the £10 billion of fiscal headroom she had in March, and to stick to her own fiscal rules.
This £22 billion figure comes from an expected downgrade in productivity growth forecasts by the OBR and higher government spending because of inflation (£11 billion), the reversal of planned welfare cuts (£6 billion) and the predicted cost of servicing government debt (£5 billion).
IFS director Helen Miller said: “There is a strong case for the chancellor to build more headroom against her fiscal rules. That wouldn’t be costless – but nor is limping from one forecast to the next under constant speculation that policy will be tightened again. Persistent uncertainty is damaging to the economic outlook.”
The problem with tax hikes
The tax burden is already at a record level. Personal tax thresholds have been frozen since 2021, and inflation has been high. This means many find themselves in a higher tax bracket thanks to fiscal drag alone.
Labour’s general election manifesto promised not to raise income tax, employees’ National Insurance or VAT, but a challenging fiscal backdrop meant Reeves had to look for other ways to balance the books last October.
The 2024 Autumn Budget put the burden on businesses. Tax hikes worth £40 billion were announced overall, with the majority being funded through an increase to employers’ National Insurance contributions.
We are now starting to see the economic impact. Survey data from the Office for National Statistics (ONS) suggests some firms are not recruiting new workers or replacing those who have left. Businesses warned this would be a consequence of higher payroll taxes.
Taxes on wealth were another focus last autumn, with policies on IHT, capital gains tax (CGT) and pensions being announced. Reports suggest this may be prompting some wealthy individuals to leave the UK for more tax-efficient shores.
The IFS suggests proper reform of the tax system would reduce the “disincentive effects” that taxes currently have on investment and the drag that they have on growth.
Was the government right to rule out the three big taxes?
The problem with leaving the three main taxes untouched is that they are the government’s biggest revenue raisers. In the 2024/25 tax year, income tax accounted for 35% of the total tax take, VAT accounted for around 20%, and employee National Insurance contributions accounted for around 6%.
Modelling from HMRC shows that hiking one of these taxes could raise billions:
- Basic-rate income tax: Adding 1p to the basic rate could raise £6.9 billion more in 2026/27, £8.25 billion more in 2027/28 and £8.2 billion more in 2028/29.
- Higher-rate income tax: Adding 1p to the higher rate could raise £1.6 billion more in 2026/27, £2.15 billion in 2027/28 and £2.1 billion in 2028/29.
- Class 1 National Insurance: Raising the main rate of Class 1 National Insurance for employees by 1p could raise £5.35 billion in 2026/27, £5.3 billion in 2027/28 and £5.4 billion in 2028/29.
- VAT: Raising the standard rate of VAT by one percentage point could raise £8.8 billion in 2026/27, £9.2 billion in 2027/28 and £9.55 billion in 2028/29.
Meanwhile, changing the rates on things like IHT and CGT is less effective, as these represent a far smaller proportion of total tax revenues – 1% and 1.5% respectively last year.
“Politically, it would be incredibly difficult [to touch the three main taxes], because Labour pledged to leave these alone in its election manifesto and has repeatedly said it won’t raise taxes for working people. However, these figures show just how much money this could raise,” said Sarah Coles, head of personal finance at Hargreaves Lansdown.
The IFS has suggested that it is possible for the chancellor to raise tens of billions of pounds a year without breaking Labour’s manifesto pledge, but doing so “would not be straightforward”.
Calculations by the IFS suggest Reeves could raise £20 billion with a new council tax surcharge that doubled the bill on band G and H properties – potentially raising £4.4 billion.
Abolishing the nil-rate band for a main residence when calculating the value of an estate for IHT could raise £6 billion, the IFS said, while ending forgiveness of capital gains tax at death could add £2.3 billion to the Treasury’s coffers.
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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.
