Autumn Budget 2025: Will taxes rise further – and which areas could Rachel Reeves target?
After announcing cash injections for several departments in her June Spending Review, the chancellor has refused to rule out tax hikes this autumn
Chancellor Rachel Reeves has refused to rule out tax hikes this autumn, as weak economic growth and stretched public services put pressure on the public purse.
After growing by more than expected in the first quarter of the year, the economy is now showing signs of slowing, having shrunk 0.3% in April against a backdrop of higher business taxes and global trade disruption.
Borrowing costs also remain high, despite cuts to the Bank of England base rate over the past year.
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When growth is weak and debt is expensive, it erodes the Treasury’s fiscal headroom, otherwise known as the amount of leeway the government has to increase spending or cut taxes.
This has put Reeves in a tight spot. Her fiscal rules mean she cannot borrow to fund day-to-day spending, leaving her with two options if she runs out of fiscal headroom going into the Autumn Budget.
The chancellor can either cut spending or increase taxes.
The first option will prove challenging. The government has ruled out a return to austerity, making spending cuts difficult, particularly against a backdrop of tough public scrutiny.
In her Spending Review on 11 June, Reeves went in the opposite direction, announcing that total department budgets would increase by 2.3% per year in real terms until 2028/29.
Although some departments will face cuts, including the Home Office and Foreign Office, others will see big cash injections.
The NHS will receive an additional £29 billion per year, social and affordable housing will receive an extra £39 billion over the next decade, and defence spending will be increased to 2.6% of GDP by 2027.
It is perhaps unsurprising. Any cuts the government has tried to make since coming into office have been met with fierce backlash.
The unpopular decision to axe the universal Winter Fuel Payment last year meant Labour lost seats to Reform in recent local council elections. The government staged an embarrassing U-turn on the policy as a result.
Benefit cuts announced in March have also proved unpopular, including with the party’s backbenchers.
All of this means tax hikes look likely this Autumn.
Speaking to the BBC the day after her Spending Review, Reeves refused to rule this option out. “No chancellor is able to write another four years of Budgets within a first year of government,” she said. “You know how much uncertainty there is in the world at the moment.”
“Not enough money to go around”
While the June Spending Review contained “few surprises”, ING economist James Smith said it was a “reminder that there’s not enough money to go around”.
He thinks the Office for Budget Responsibility (OBR) will revise its 2026 growth forecast down when the Autumn Budget is delivered later this year. That alone would wipe out half of the Treasury’s fiscal headroom, in his view.
“Further downgrades to trend productivity growth projections, as well as net migration, mean the chancellor is likely in the red, before even considering the mounting pressures on the public purse,” he added.
ING thinks the overall shortfall could come to “at least £20 billion”, making tax rises “highly likely”.
The Institute for Fiscal Studies (IFS), an independent think-tank, points out that the chancellor has had some tough balancing acts to perform. Fiscal constraints mean “we can’t have everything we might want,” said IFS director Paul Johnson.
That said, Johnson added that Reeves will now have “all her fingers and all her toes crossed”, with the fiscal rules currently being met “by a gnat’s whisker”. He agrees that any move in the wrong direction will “almost certainly spark more tax rises”.
The problem with tax hikes
The problem the government faces is that 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 are finding themselves in a higher tax bracket thanks to fiscal drag alone.
Labour’s 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.
Her 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.
It is a careful balancing act, though, and every decision comes with unintended consequences. In this instance, hiking National Insurance appears to have damaged business confidence and increased the risk of weaker profits and staff layoffs.
Taxes on wealth were another focus last autumn, with policies on capital gains tax, inheritance tax and pensions all being announced. This has led to a higher number of wealthy individuals leaving the UK for more tax-efficient shores.
Which taxes could go up?
If taxes do go up this autumn, Reeves will need to look for areas that remain untapped.
Further business tax hikes would be a dangerous move, given that companies have already been hit hard by the National Insurance hike. Hiking the three main working taxes would also be politically risky, given that Labour ruled this out in its manifesto.
We take a closer look at some areas the chancellor might consider.
1. Income tax
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.
“It’s politically useful because it increases the tax take, without actually being a tax rise,” said Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown.
“The problem is that this will raise money in future years – beyond 2028 – so won’t help in balancing the books in the interim,” Coles added.
Some might see it as a broken manifesto promise, given the government promised not to hike income tax when seeking election.
2. Salary sacrifice on pensions
Salary sacrifice arrangements have been another area of speculation.
Under current rules, employees can give up a slice of their pay in exchange for 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 this year, a 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’s not the first time that salary sacrifice has come under the spotlight as a potential area for shoring up the tax take, and given the pressures on the public purse, it would be surprising if no one in government was looking at this report,” said Gary Smith, financial planning partner at wealth management firm Evelyn Partners.
3. Pensions
A significant tax hit is already looming for pensions, when they are brought inside the inheritance tax (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.
Recent data suggests the number of people raiding their pension at age 55 has surged, with some withdrawing the cash to make lifetime gifts in the hope of paying less IHT.
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 paid at your marginal rate.
However, this would be difficult to implement from an operational perspective, particularly for those in “net pay” schemes where your pension contribution is taken from your pre-tax pay. To claw the money back, HMRC would effectively need to apply a separate tax charge.
Scrapping or reducing the tax-free cash allowance would also be a risky move, given that this benefit is both popular and widely understood.
“Rather than let uncertainty rattle savers, the chancellor should take pre-emptive action and introduce a ‘pensions tax lock’, ruling out changes to tax-free cash or pension tax relief for the rest of this parliament,” said Laith Khalaf, head of investment analysis at platform AJ Bell.
“A firm commitment would offer investors the confidence to plan for the long term and give real momentum to the retail investing revolution Rachel Reeves says she wants to champion.”
4. Investments
Reeves hiked capital gains tax rates at the last Budget, meaning further measures involving this tax are unlikely this time around. Coles doesn’t think dividends are a likely target either.
“Dividend tax was mentioned in last month’s leaked memo, which Angela Rayner submitted to the Treasury in March, but this has already been squeezed significantly in recent years,” she said.
“The rates were hiked back 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 counter-intuitive to make dividend investing less rewarding given that the government is keen to encourage investment in the UK.”
ISA reform could be on the cards, but any changes are likely to focus on cash savers rather than investors. Reeves has ruled out cutting the overall £20,000 ISA allowance, but the amount savers are allowed to funnel into cash savings accounts could be limited in an attempt to encourage a culture of investing.
5. Inheritance tax
Inheritance tax is a political hot potato, and the government has been burned in recent months after reforms to agricultural property relief incited fury among farmers.
That said, don’t rule out further changes. Reeves could consider clamping down on gifting rules if she wants to boost tax revenues in this area.
Current rules allow you to give away assets in your lifetime to avoid IHT, as long as you outlive the gift by seven years.
Something called taper relief kicks in after three years – meaning a reduced rate of IHT is applied if the gift-giver passes away at this point. The IHT rate falls further with each year that passes after the three-year point.
For example, if someone dies 3-4 years after giving a gift, an IHT rate of 32% is applied. If they pass away 6-7 years after giving a gift, a rate of 8% applies.
If Reeves wanted to clamp down on gifting rules, she could consider making taper relief less generous. Alternatively, she could change the rules so that it takes longer for gifts to become exempt.
Experts have previously warned that this would not raise much money this parliament unless the rules were applied retrospectively, which seems unlikely.
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Katie has a background in investment writing and is interested in everything to do with personal finance, politics, and investing. She enjoys translating complex topics into easy-to-understand stories to help people make the most of their money.
Katie believes investing shouldn’t be complicated, and that demystifying it can help normal people improve their lives.
Before joining the MoneyWeek team, Katie worked as an investment writer at Invesco, a global asset management firm. She joined the company as a graduate in 2019. While there, she wrote about the global economy, bond markets, alternative investments and UK equities.
Katie loves writing and studied English at the University of Cambridge. Outside of work, she enjoys going to the theatre, reading novels, travelling and trying new restaurants with friends.
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