Will taxes rise further in the 2025 Autumn Budget?

Tax hikes are widely expected 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. GDP dropped for two months in a row in April and May against a backdrop of higher business taxes and global trade disruption.

Government borrowing also hit £20.7 billion in June – the second highest on record for the month – despite a £5.7 billion increase in the tax take. The only time borrowing was higher in the month of June was during the pandemic.

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The cost of debt has increased too. The government spent £16.4 billion on interest repayments in June, also the second highest on record for the month.

This puts chancellor Rachel Reeves in a tough spot. She has promised to get debt falling as a share of GDP by 2029/30, but weak economic growth makes this more difficult.

She has also promised not to borrow money to pay for day-to-day spending – but a higher tax take hasn’t been enough to counteract increased government running costs.

When Reeves delivered her Spring Statement in March, her so-called ‘fiscal headroom’ was around £10 billion – otherwise known as the amount of leeway she has when balancing the books.

By the time we reach the Autumn Budget, economists believe this buffer will have been wiped out entirely. High borrowing costs, weak economic growth and expensive policy U-turns are largely to blame.

This would leave the Treasury with two options – cut spending or increase taxes.

“Recent events have shown how hard it is for the government to bring spending down. Welfare reform was heavily watered down, while winter fuel payments have been reinstated for millions,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

“As we approach the summer recess, this is all going to result in additional speculation on which tax rises will be coming down the line given the need to plug the holes.”

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.

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 capital gains tax (CGT), inheritance tax (IHT) and pensions all being announced. This is not a simple solution either.

Taxpayers often change their behaviour in response to new rules, and the latest figures show CGT receipts have dropped. Some reports also suggest wealthy individuals are leaving the UK for more tax-efficient shores.

Was the government right to rule out the three big taxes?

In the lead-up to last year’s general election, Labour promised not to raise the three main working taxes – income tax, employees’ National Insurance contributions, and VAT. The problem is that these are some of the biggest revenue-raisers for the government.

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.

“In an environment where there are no great and popular choices, the government will need to find the ‘least worst’ options, so we need to consider the potential impact of these changes.”

Which taxes could go up?

If the government sticks to its promise not to raise the three main working taxes, Reeves will need to look for other areas that remain untapped. We take a closer look at some areas the chancellor might consider.

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 in recent weeks.

“It’s politically useful because it increases the tax take, without actually being a tax rise,” said Coles. “The problem is that this will raise money in future years – beyond 2028 – so won’t help in balancing the books in the interim.”

Furthermore, some might see it as a broken manifesto promise, given the government promised not to hike income tax when seeking election.

2. Salary sacrifice

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 Evelyn Partners.

3. Pensions

A significant tax hit is already looming for pensions, when they are 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.

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 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 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 CGT rates at the last Budget, meaning further measures involving this tax could prove unlikely this time around. Coles doesn’t think dividends are a likely target either.

“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,” 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 counterintuitive to make dividend investing less rewarding given that the government is keen to encourage investment in the UK.”

5. Inheritance tax

IHT is a political hot potato, and the government has been burned in recent months after reforms to agricultural and business property relief incited fury among farmers and family business owners.

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 three to four years after giving a gift, an IHT rate of 32% is applied (a discount on the full rate of 40%). If they pass away six to seven 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.

6. Wealth tax

A wealth tax is another area of speculation, but would be seen as an extreme move. Keir Starmer refused to rule it out when quizzed by Kemi Badenoch at Prime Minister’s Questions on 9 July.

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 payable by 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 (IFS). “Taxing the same wealth every year would penalise saving and investment.”

Implementing a wealth tax could also prove difficult. “It would require the government to set up a new administrative apparatus to value wealth – and valuation would be extremely difficult for some assets, such as private businesses. It is much easier to observe and tax the stream of income they generate,” Adam added.

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.