Despite the chancellor, Rachel Reeves, saying after last year’s Budget that ‘we will not be coming back with more tax increases’, she recently acknowledged that ‘everyone can see in the last year the world has changed and we’re not immune to that change’.
The Office for Budget Responsibility is reviewing productivity numbers with an expected downgrade, creating what is rumoured to be an overall gap in the public finances of around £30bn, compounded by geopolitical instability, wars and tariffs. It is not surprising, therefore, that questions about whether the Government can afford to keep its party’s manifesto pledges not to increase the rates of income tax, national insurance or VAT are mounting.
The Budget is likely to include some quick, easy-to-implement changes but as only the second one in this parliament, the Chancellor does have time to consider tax reform which could reap rewards and support her growth agenda in the longer term.
One area that is a candidate for tax reform is real estate tax. SDLT can be a disincentive for people to move, council tax is widely seen as disproportionally unfair and those with expensive homes can currently sell their principal residence tax-free.
Measures which have been reported as being considered by the government include:
National insurance: Last year’s Budget made clear that Labour’s manifesto pledge not to increase NICs only referred to employee NICs (and not employer’s NICs).
Two proposals currently being reported include:
Income tax threshold: Despite the chancellor confirming in last year’s Budget that the freeze on the personal allowance and higher-rate income tax threshold would be lifted from 2028/29, many expect this to be reconsidered.
It would be a simple way to raise a large amount annually (with more taxpayers being brought into paying tax, or into higher tax brackets, as wages rise due to inflation), while technically maintaining the manifesto pledge not to increase the rates of income tax.
Dividend income: Increasing higher rate tax paid on dividends and/or abolishing the £500 dividend allowance were both options suggested shortly before the Spring Statement, by former deputy prime minister Angela Rayner, and so could be back on the agenda.
Capital gains tax: CGT rates for the disposal of shares and other assets were increased in last year’s Budget but could be increased again.
The chancellor could also further reduce (or abolish) the annual exempt amount or other reliefs (such as Business Asset Disposal Relief), although businesses and individuals alike will hope that the significant impact that such changes would have on employee shareholders and tax-advantaged share plans would be carefully considered and appropriate exemptions built in.
Other options that have been suggested for the government to consider include abolishing the favourable CGT uplift when assets are passed on upon death and introducing a CGT ‘exit tax’ for individuals if they leave the UK permanently.
There has been precedent in previous Budgets for changes to take effect from midnight on Budget day, supported by anti-forestalling provisions. Individuals may therefore want to complete asset disposals or structure their affairs in advance of the Budget to lock in the current CGT rates, reliefs and allowances.
Pensions: Pensions represent a significant area of tax relief, so are another potential target area. Options include reducing the £268,275 (tax free) lump-sum allowance, removing or restricting the option of salary sacrifice, capping up-front income tax relief on contributions, imposing employer’s NICs or even reinstating the £1m pension lifetime allowance.
Pensions tax has seen a number of changes in recent years and the chancellor will need to weigh up any ‘quick wins’ against a risk of loss of confidence in pension saving. For example, the members of defined contribution (DC) pension schemes in particular are likely to be affected by the planned introduction of IHT on unused pension funds and certain death benefits from April 2027. With many already finding it difficult to save adequately for retirement, any disincentive to pension saving – real or perceived – could be harmful.
The Finance Bill, published after the Budget, is likely to include an updated draft of the legislation needed to introduce inheritance tax and pensions change from April 2027. There are certain areas (such as the carve out for death-in-service benefits) where additional clarity would be helpful.
Inheritance tax: The Government may be considering the introduction of a lifetime cap on lifetime gifts that can be made free of tax, or extending the potentially exempt transfer (PET) period from seven years, possibly to ten.
Another suggestion has been to end inheritance tax relief on AIM shares, although the relief was only reduced from 100% to 50% earlier this year.
Stamp duty: It has been rumoured that the government may introduce a temporary stamp duty ‘holiday’ (of perhaps two or three years) for investors on buying shares of newly-listed companies in the UK. Shares traded on the AIM market and certain other growth markets are already exempt from stamp duty (and SDRT).
In addition to encouraging growth in UK companies, which Ms Reeves has previously championed, this proposal may also help to level the playing field with overseas listings where there is often no equivalent tax to stamp duty (or stamp duty reserve tax) on the trading of non-UK shares.
Banks: Banks currently pay both a corporation tax surcharge (3% on top of the main corporation rate of 25%) and the bank levy.
Raising the surcharge and/or levy would be straightforward, but the chancellor would need to weigh the prospect of additional taxation for the sector against ramifications for her growth agenda. She recently stated in her Mansion House speech that she has ‘placed financial services at the heart of this government’s growth mission’.
VAT registration thresholds and rates: Labour’s manifesto pledged not to increase VAT rates but there could be some tinkering with thresholds, reliefs and rates.
Views on the VAT registration threshold (which is currently £90,000) can be divided. Any decision will be a balancing act for the Chancellor – some argue that a lower threshold would create fairer competition (and stop the bunching of businesses just below the threshold) and would raise much needed revenue, whereas others argue for a higher threshold to encourage small businesses to expand and promote growth and productivity.
In recent months, there have also been a number of VAT tribunal decisions around the VAT treatment of different types of food, with rates differing depending on the classification of foods and so it is possible that some uniformity in that area may be suggested.
VAT on private hire vehicles: It is rumoured that the government will publish its response to its consultation into the VAT treatment of private hire vehicles to confirm that VAT should be charged on all private hire taxi journeys.
Increase gambling duties: The Institute for Public Policy Research has proposed the increase in gambling taxes – suggesting that gaming duty should be increased from 21% to 50%, machine gaming duty from 20% to 50%, and general betting duty from 15% to 25%. The sector also currently enjoys complete exemption from VAT.
With Rachel Reeves recently stating that gambling companies ‘should pay their fair share of taxes and we’ll make sure that happens’, it seems likely that some announcement will be made in the Budget.
Building on the measures already announced at the Spring Statement and proposals included in the draft legislation published for inclusion in the next Finance Bill, there may be further announcements in relation to closing the ‘tax gap’.
There may also be further clarity on proposals previously outlined – for example, at the Spring Statement, it was announced that HMRC would launch a new US-style reward scheme later in 2025 targeting ‘serious non-compliance in large corporates, wealthy individuals, offshore and avoidance schemes’.
Aside from the rumours already circulating, there are also various consultations to which the government is yet to respond. There could be some announcements relating to:
The Chancellor will deliver her Budget against a backdrop of worsening public finances and the likelihood of tax rises which, depending on where they are directed and their severity, can affect economic growth. The question in her second Budget is how wide ranging and deep those potential tax rises will be, and how any that are announced fit into her plan for economic growth.
Despite the chancellor, Rachel Reeves, saying after last year’s Budget that ‘we will not be coming back with more tax increases’, she recently acknowledged that ‘everyone can see in the last year the world has changed and we’re not immune to that change’.
The Office for Budget Responsibility is reviewing productivity numbers with an expected downgrade, creating what is rumoured to be an overall gap in the public finances of around £30bn, compounded by geopolitical instability, wars and tariffs. It is not surprising, therefore, that questions about whether the Government can afford to keep its party’s manifesto pledges not to increase the rates of income tax, national insurance or VAT are mounting.
The Budget is likely to include some quick, easy-to-implement changes but as only the second one in this parliament, the Chancellor does have time to consider tax reform which could reap rewards and support her growth agenda in the longer term.
One area that is a candidate for tax reform is real estate tax. SDLT can be a disincentive for people to move, council tax is widely seen as disproportionally unfair and those with expensive homes can currently sell their principal residence tax-free.
Measures which have been reported as being considered by the government include:
National insurance: Last year’s Budget made clear that Labour’s manifesto pledge not to increase NICs only referred to employee NICs (and not employer’s NICs).
Two proposals currently being reported include:
Income tax threshold: Despite the chancellor confirming in last year’s Budget that the freeze on the personal allowance and higher-rate income tax threshold would be lifted from 2028/29, many expect this to be reconsidered.
It would be a simple way to raise a large amount annually (with more taxpayers being brought into paying tax, or into higher tax brackets, as wages rise due to inflation), while technically maintaining the manifesto pledge not to increase the rates of income tax.
Dividend income: Increasing higher rate tax paid on dividends and/or abolishing the £500 dividend allowance were both options suggested shortly before the Spring Statement, by former deputy prime minister Angela Rayner, and so could be back on the agenda.
Capital gains tax: CGT rates for the disposal of shares and other assets were increased in last year’s Budget but could be increased again.
The chancellor could also further reduce (or abolish) the annual exempt amount or other reliefs (such as Business Asset Disposal Relief), although businesses and individuals alike will hope that the significant impact that such changes would have on employee shareholders and tax-advantaged share plans would be carefully considered and appropriate exemptions built in.
Other options that have been suggested for the government to consider include abolishing the favourable CGT uplift when assets are passed on upon death and introducing a CGT ‘exit tax’ for individuals if they leave the UK permanently.
There has been precedent in previous Budgets for changes to take effect from midnight on Budget day, supported by anti-forestalling provisions. Individuals may therefore want to complete asset disposals or structure their affairs in advance of the Budget to lock in the current CGT rates, reliefs and allowances.
Pensions: Pensions represent a significant area of tax relief, so are another potential target area. Options include reducing the £268,275 (tax free) lump-sum allowance, removing or restricting the option of salary sacrifice, capping up-front income tax relief on contributions, imposing employer’s NICs or even reinstating the £1m pension lifetime allowance.
Pensions tax has seen a number of changes in recent years and the chancellor will need to weigh up any ‘quick wins’ against a risk of loss of confidence in pension saving. For example, the members of defined contribution (DC) pension schemes in particular are likely to be affected by the planned introduction of IHT on unused pension funds and certain death benefits from April 2027. With many already finding it difficult to save adequately for retirement, any disincentive to pension saving – real or perceived – could be harmful.
The Finance Bill, published after the Budget, is likely to include an updated draft of the legislation needed to introduce inheritance tax and pensions change from April 2027. There are certain areas (such as the carve out for death-in-service benefits) where additional clarity would be helpful.
Inheritance tax: The Government may be considering the introduction of a lifetime cap on lifetime gifts that can be made free of tax, or extending the potentially exempt transfer (PET) period from seven years, possibly to ten.
Another suggestion has been to end inheritance tax relief on AIM shares, although the relief was only reduced from 100% to 50% earlier this year.
Stamp duty: It has been rumoured that the government may introduce a temporary stamp duty ‘holiday’ (of perhaps two or three years) for investors on buying shares of newly-listed companies in the UK. Shares traded on the AIM market and certain other growth markets are already exempt from stamp duty (and SDRT).
In addition to encouraging growth in UK companies, which Ms Reeves has previously championed, this proposal may also help to level the playing field with overseas listings where there is often no equivalent tax to stamp duty (or stamp duty reserve tax) on the trading of non-UK shares.
Banks: Banks currently pay both a corporation tax surcharge (3% on top of the main corporation rate of 25%) and the bank levy.
Raising the surcharge and/or levy would be straightforward, but the chancellor would need to weigh the prospect of additional taxation for the sector against ramifications for her growth agenda. She recently stated in her Mansion House speech that she has ‘placed financial services at the heart of this government’s growth mission’.
VAT registration thresholds and rates: Labour’s manifesto pledged not to increase VAT rates but there could be some tinkering with thresholds, reliefs and rates.
Views on the VAT registration threshold (which is currently £90,000) can be divided. Any decision will be a balancing act for the Chancellor – some argue that a lower threshold would create fairer competition (and stop the bunching of businesses just below the threshold) and would raise much needed revenue, whereas others argue for a higher threshold to encourage small businesses to expand and promote growth and productivity.
In recent months, there have also been a number of VAT tribunal decisions around the VAT treatment of different types of food, with rates differing depending on the classification of foods and so it is possible that some uniformity in that area may be suggested.
VAT on private hire vehicles: It is rumoured that the government will publish its response to its consultation into the VAT treatment of private hire vehicles to confirm that VAT should be charged on all private hire taxi journeys.
Increase gambling duties: The Institute for Public Policy Research has proposed the increase in gambling taxes – suggesting that gaming duty should be increased from 21% to 50%, machine gaming duty from 20% to 50%, and general betting duty from 15% to 25%. The sector also currently enjoys complete exemption from VAT.
With Rachel Reeves recently stating that gambling companies ‘should pay their fair share of taxes and we’ll make sure that happens’, it seems likely that some announcement will be made in the Budget.
Building on the measures already announced at the Spring Statement and proposals included in the draft legislation published for inclusion in the next Finance Bill, there may be further announcements in relation to closing the ‘tax gap’.
There may also be further clarity on proposals previously outlined – for example, at the Spring Statement, it was announced that HMRC would launch a new US-style reward scheme later in 2025 targeting ‘serious non-compliance in large corporates, wealthy individuals, offshore and avoidance schemes’.
Aside from the rumours already circulating, there are also various consultations to which the government is yet to respond. There could be some announcements relating to:
The Chancellor will deliver her Budget against a backdrop of worsening public finances and the likelihood of tax rises which, depending on where they are directed and their severity, can affect economic growth. The question in her second Budget is how wide ranging and deep those potential tax rises will be, and how any that are announced fit into her plan for economic growth.
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