Daniel Hilton
Chancellor Rachel Reeves is heading towards her second Budget with the pressures of high borrowing costs, weak economic growth and stretched public services.
Many experts predict that tax hikes and spending cuts are almost inevitable in the Autumn Budget.
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When asked by the Guardian whether higher taxes on the wealthy will be announced in the Autumn Budget, Reeves said “that will be part of the story”.
She also hinted at the possibility of tax rises last month. Speaking at the Labour party conference on 29 September, she warned of “further tests” over the coming months, “made all the harder by harsh global headwinds”.
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, new 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.
The IFS says that without increased taxes or cut spending, borrowing in 2029/30 will be £22 billion more than the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, calculated in March, breaking the government’s 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).
The IFS has made the case that Reeves should raise even more money in her Budget to increase the UK’s fiscal headroom, the amount of cash the government can spend without raising new taxes or cutting spending.
Reeves was left with £10 billion of fiscal headroom after the Spring Statement in March. This is significantly less than the £30 billion average that chancellors have left themselves on average since 2010.
IFS director Helen Miller said: “When choosing to operate her fiscal rules with such teeny tiny headroom, Reeves would have known that run-of-the-mill forecast changes could easily blow her off course.
“A key challenge is ensuring that fiscal groundhog day doesn’t become a twice-yearly ritual. 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 says simply raising tax rates without reform would do more economic damage than is necessary.
The thinktank suggests that 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.
“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.”
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.
Another £1.2 billion could be raised by increasing the bank surcharge to 6%, while £900 million could be generated by abolishing business asset disposal relief.
HMRC could also raise £5 billion by boosting tax compliance among smaller companies, particularly in terms of owed corporation tax, the IFS said.
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 moves 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. Reeves refused to rule it out when quizzed at the Labour party conference.
“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.
Calculations from Rathbones show 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.
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 have been another area of speculation.
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’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, 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 Coles.
“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 was a significant focus last autumn, 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.
Current rules allow you to give away assets in your lifetime to avoid IHT, as long as you outlive the gift by seven years. For now, there is no limit on the value of the gifts, provided this timeline is met.
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.
“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.”
She also points out that keeping track of a lifetime cap could prove administratively complex for HMRC.
6. Property taxes
Some of the latest rumours have focused on property taxes, including the possible replacement of stamp duty with a new levy on the sale of properties worth more than £500,000.
While the exact details of what the government is considering are unclear, the rumoured policy seems to have been partly inspired by a report from the think tank Onward.
The think tank’s campaigners propose 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.
As well as looking at stamp duty, the Treasury is supposedly 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.
While stamp duty changes could theoretically be implemented fairly quickly, council tax reforms would probably take much longer, potentially requiring Labour to win a second term in office.
Another area Reeves is said to be considering is CGT on expensive houses. Under current rules, CGT is only charged on the sale of second homes, but rumoured changes could bring first homes inside the CGT net too, if they are worth more than a certain threshold.
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.”
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.
8. Business taxes
The government has promised not to raise corporation tax above its current level of 25% for the duration of this Parliament, meaning the tax is unlikely to be an area of focus in the upcoming Budget. However, businesses could be impacted in other ways. Business rates are one example – a tax on the occupation of non-domestic property.
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).
We don’t yet know what these rates will look like in practice, but 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 argues that shifting the burden onto larger businesses is not the right approach. Estimates from the BRC suggest 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. Food inflation has already shot up this year, partly driven by policies in last year’s Budget, such as higher payroll taxes and a higher minimum wage.
In theory, there are other areas the Treasury could target – but they also come with risks. For example, the Resolution Foundation has called on the government to build on the existing Soft Drinks Industry Levy by adopting a broader Sugar and Salt Reformulation Tax. This could also push prices up.
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.
In excess of 13,000 partners earn an average £1.25 million a year, according to the Times, with solicitors making £316,000 a year on average, doctors £118,000 and accountants £246,000.
Someone in a partnership earning £316,000 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.
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.
Panicked reactions this time around could also have negative consequences. The property market is just one example. “The rumours around council tax and stamp duty could damage your home-buying plans and have a knock-on impact on the wider market if people make dramatic changes based on fear,” Coles said.
That said, there are some sensible steps you can take as part of your ongoing financial planning:
- 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: If you have cash savings, consider putting them in 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 and most people underestimate how much they will need for retirement. “The annual pension allowance is £60,000 and the fact you get tax relief at your highest marginal rate means higher earners in particular should look to take as much advantage as makes sense for their finances,” Coles said.
- Salary sacrifice: Salary sacrifice allows you to swap a portion of your salary for an equivalent benefit, such as a pension contribution, and helps both you and your employer pay less tax. It is also a good option for higher earners once they start to lose means-tested payments like Child Benefit, as it reduces your take-home pay without actually leaving you worse off overall.
- Lifetime gifts: If you are concerned about an IHT liability and are in a position to give gifts to your family, consider the most tax-efficient way to do it. 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.
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