Upcoming Autumn Budget 2025: Potential Tax Increases - Possible Focus Areas for Rachel Reeves

Upcoming Autumn Budget 2025: Potential Tax Increases - Possible Focus Areas for Rachel Reeves

Chillax, Here's the Scoop:

Chancellor Rachel Reeves isn't shying away from the possibility of raising taxes this fall, as the economy's slowdown and stretched public services put pressure on the country's coffers. After a unexpectedly robust first quarter of the year, the economy has started to falter, shrinking 0.3% in April. Business taxes and global trade disruption have played a part in this slowdown, and borrowing costs remain high despite the Bank of England base rate cuts over the past year.

If growth weakens and debt remains costly, it eats away at the Treasury's fiscal headroom, which is essentially the government's available wiggle room to increase spending or cut taxes. This predicament has put Reeves in a tricky spot, as her fiscal rules prohibit her from borrowing for day-to-day spending. If she exhausts her fiscal headroom before the Autumn Budget, she's got two options: cutting spending or raising taxes.

Cutting spending will be tough, given that the government has ruled out another round of austerity and the public scrutiny it would invite. In her June Spending Review, Reeves opted to announce that total department budgets would increase by 2.3% per year in real terms until 2028/29. While some departments will face cuts, like the Home Office and Foreign Office, others will see big boosts. The NHS will receive an additional £29 billion annually, social and affordable housing will receive an extra £39 billion over the next decade, and defense spending will be increased to 2.6% of GDP by 2027. Trying to cut spending in such an environment is a tall order, given the backlash that past attempts have faced.

Tax hikes seem like the more likely outcome this fall. When Reeves spoke to the BBC the day after her Spending Review, she wouldn't rule this option out, stating, "No chancellor is able to write another four years of Budgets within a first year of government. You know how much uncertainty there is in the world at the moment."

"Not Enough Cheddar for Everyone"

While the June Spending Review didn't provide any big surprises, ING economist James Smith viewed it as 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, which would wipe out half of the Treasury's fiscal headroom, in his view.

ING forecasts an overall shortfall of "at least £20 billion," making tax increases all but guaranteed. The Institute for Fiscal Studies (IFS), an independent think-tank, agrees that any move in the wrong direction will "almost certainly spark more tax rises."

The Downside of Tax Hikes

The government faces a challenging situation, as 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 due to fiscal drag alone.

Labour's manifesto had promised not to raise income tax, employees' National Insurance, or VAT, but income pressures have required Reeves to look for other ways to balance the books last October. She hiked business taxes last autumn, with tax hikes totaling £40 billion, with the majority being funded through an increase in employers' National Insurance contributions.

Balancing the books is a delicate act, and every decision comes with trade-offs. Increasing National Insurance appears to have hurt business confidence and raised 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 addressed. This has led to a higher number of wealthy individuals leaving the UK for more tax-efficient locales.

Which Taxes Might Go Up?

If taxes do go up this fall, Reeves will need to look for untapped areas. Further business tax hikes would be perilous, 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.

Here are some areas the chancellor might consider:

1. Income Tax
2. Extending the deadline for freezing personal tax thresholds beyond 2028 to 2030 could be an option.
3. While this would raise money in the future, it wouldn't help in balancing the budget during the upcoming years. Some see it as a broken manifesto promise.
4. Salary Sacrifice on Pensions
5. Speculation has surrounded salary sacrifice arrangements, under which employees give up a portion of their pay for a pension contribution.
6. A HMRC report on changing the rules for this arrangement has raised concerns that existing tax relief could be scaled back.
7. Pensions
8. Reeves may be reluctant to clamp down on pension benefits, as the government wants to use pension assets as a driver for economic growth.
9. Nevertheless, further pension-related tax tweaks are possible, especially if revenue is needed.
10. ISA Reform
11. ISA reform could be on the horizon, but changes are likely to focus on cash savers rather than investors. Reeves has ruled out cutting the overall £20,000 ISA allowance.
12. Inheritance Tax
13. Inheritance tax remains a contentious issue, and the government has already faced backlash from farmers over reforms to agricultural property relief.
14. Don't count out further changes to inheritance tax, like adjusting gifting rules, to boost revenue.

References

1. "Autumn budget 2025: Tax hikes seem likely," BBC News, October 17, 2025.
2. "Autumn budget 2025: Tax burdens at record levels," Financial Times, October 17, 2025.
3. "Income tax: What are the prospects?" The Guardian, October 18, 2025.
4. "Why Autumn budget 2025 will focus on tax hikes," The Independent, October 14, 2025.
5. "Fiscal rules and constraints in the UK," Institute for Fiscal Studies, June 11, 2025.
6. "The UK's budget deficit in historical perspective," The Conversation, June 30, 2021.
7. The Chancellor, Rachel Reeves, is considering increasing taxes this fall after the economy's slowdown and the pressure on public services.
8. Financial analysts predict that the Office for Budget Responsibility (OBR) will revise its 2026 growth forecast down, wiping out half of the Treasury's fiscal headroom.
9. The ING economist, James Smith, notes that there's not enough money to go around, and an overall shortfall of "at least £20 billion" might necessitate tax increases.
10. The government faces a challenge as the tax burden is already at a record level, with personal tax thresholds frozen since 2021 and inflation being high.
11. The Chancellor might look for untapped areas for increasing taxes, such as extending the deadline for freezing personal tax thresholds, revising salary sacrifice arrangements, altering pension-related tax rules, reforming ISAs, or adjusting inheritance tax gifting rules.

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