With the announcement that the Chancellor Rachel Reeves’ Autumn Budget has been scheduled for 26 November, we now have the opportunity to consider what it might entail for us. Whilst a number of different ideas have been floated in the media over the past few weeks, we will only know with certainty what policies the Chancellor has elected to pursue when she stands up at the despatch box in parliament on the day itself. Having said that, there are some broad principles that can help shape our understanding of what the likely outcomes might be.
Likely rises in taxation
It is a near-certainty that taxes are going up. In the fiscal year 2024/25, the most recent year for which we have published data, the UK borrowed £148.3 billion from investors. This means that the government was spending more money than it was raising in tax receipts, and that in order to balance the books, the difference was made-up via borrowing using UK government bonds, also known as gilts.
The cost of this debt, and previous debt accumulated over the years, now sits at around £2.9 trillion, or approximately 100% of the total annual economic output of the UK.
The level of the debt matters, because it affects the interest rate that gilt investors will charge the UK government to lend it money. At the time of writing, a 10 year UK government bond costs the government 4.70%, and a 30 year UK government bond costs the government 5.55%. These are close to multi-decade highs, putting strain on the public purse. The more money that must be paid in debt interest, the less money there is available for the government to spend on other things.
In this scenario, there are several possible ways out:
- The government gets economic growth rising faster than the cost of borrowing
- The government cuts spending in order to balance the books
- The government raises taxes to the extent that revenue matches spending
- The government attempts to ‘muddle through’ without taking any decisive action
The first one of these is implausible, and the last would not be credible to the markets. Cutting spending is possible, and Rachel Reeves has been exhorted to do this by major bond investors, but this is particularly difficult for a Labour government that was elected on an anti-austerity platform. This therefore leaves most of the work to be done via tax rises, the third option.
There was a promise in the 2024 Labour Party manifesto not to raise taxes on working people, understood to mean Income Tax, National Insurance or VAT. Assuming this promise is not broken in the 2025 Budget, this therefore only leaves a limited number of possible alternatives that would raise enough revenue to make a meaningful difference. Some possibilities for this are below:
Freezing Income Tax bands (aka fiscal drag)
By keeping Income Tax thresholds frozen (rather than raising them with inflation), more people – especially middle earners – will be dragged into higher tax brackets over time. This tactic can raise significant revenue without formally increasing tax rates. The Times estimates this could generate about £7 billion and eventually bring around one million more higher-rate taxpayers. This keeps to the letter of the manifesto promise, but breaks it in spirit, as it effectively raises Income Tax via fiscal drag.
Pension tax relief changes
The Budget may introduce a flat rate for pension tax relief, or new limits on tax-free lump sum withdrawals. These adjustments could rebalance the tax advantage for higher earners saving into pensions. Whilst reducing tax-free cash limits might generate a bit of extra revenue, much more would be gained by implementing a flat rate of up-front tax relief. Under the current system, the government spends over £50 billion a year on this type of relief, and it is extremely tempting to reduce this cost to the state.
Property-related taxes
The Chancellor is contemplating extending Capital Gains Tax to expensive primary residences, effectively targeting “mansion owners” who traditionally enjoy exclusions. The mooted level at which this might apply however is on properties valued over £500,000, which would catch a large number of dwellings that would not normally be classed as mansions.
Stamp Duty Land Tax
Other options include abolishing Stamp Duty Land Tax and replacing it with an annual levy on the value of a property’s value, or perhaps undertaking the long-expected overhaul of Council Tax. For more information on what the potential changes are, you can read our recent article.
Wealth and Capital Gains Tax
Pressure from trade unions and some Labour MPs is mounting for the possibility of some kind of wealth tax. A 2% annual wealth tax on assets above £10 million was analysed by King’s College London, and was considered to be a large potential revenue-raiser. Other elements of the government are more cautious on this proposal, noting that the wealthiest taxpayers also tend to be potentially the most internationally mobile. The Chancellor may also increase the rates of CGT to more closely align them with Income Tax rates.
Sin taxes
Raising the tax burden on gambling operations is under active consideration as a targeted revenue stream. At the same time, increased duties on sugary or unhealthy food items, as well as potentially increasing fuel duty, have been floated as relatively justifiable tax increases, though fuel is politically sensitive, and risks feeding through into higher inflation.
Conclusion
Whilst there are a number of possible options, nothing is certain until the day itself. It is quite possible that even the Chancellor herself has not yet decided where she will focus her attention.
What we can be certain about is that whilst taxes are very likely to rise, comprehensive financial planning can help you steer your course through the resulting outcomes. We will be publishing a detailed summary and analysis of the Chancellor’s Autumn Budget, but if you would like to speak with us about this in the meantime, please do get in touch.
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