If there is one thing that is clear three months out from the Autumn Budget, it is that Chancellor Rachel Reeves will hike taxes.
The Office for Budget Responsibility (OBR), which scores the economic impacts of the government’s policies and publishes forecasts on public finances, has been questioned for being over optimistic on measures such as productivity and the cost of borrowing.
But Reeves cannot escape the criticism, taking a risky gambit by drawing in a small fiscal headroom of £9.9bn at the Spring Statement. The buffer was the third-smallest on record of any Chancellor since 2010.
According to her fiscal rules, day-to-day spending must match income on a rolling three-year horizon.
Crucially, high tax receipts rely on sustained growth, which has been wobbly over the last few months.
The other key rule states public sector financial liabilities, which is more flexible as a debt measurement given it allows the government to borrow to invest in financial assets, must fall at the end of a rolling three-year period.
These rules and the OBR’s judgments are crucial to prevent further debt interest payments to bond holders every year, which are already hitting over £105bn a year, which is double the current defence budget.
Tax raid predictions
City analysts and think tanks have attempted to sum up how a deteriorating outlook on productivity, higher debt servicing costs and U-turns on £6bn welfare spending cuts, which were baked into the OBR’s last fiscal forecast, will erode Reeves’ headroom.
With the Chancellor refusing to budge on her £190bn spending splurge on public services in the next three years, tax hikes seem to be the only way out for the government by the autumn.
JP Morgan believes Reeves could get away with just over £10bn in tax hikes, filling a hole in the public purse without re-building her headroom – a risk that could spook UK government bond traders.
The National Institute of Economic and Social Research (NIESR), which is one of the UK’s oldest think tanks, has published a gloomier forecast on the UK economy.
It believes taxes may have to go up by more than £50bn to cover costs and restore a credible headroom that will make bond traders more assured about Labour’s fiscal plans.
Capital Economics and other leading analysts believe taxes will have to rise in the range of £15bn to £25bn.
A giant tax raid would put Labour’s manifesto commitments not to raise income tax, VAT, employee national insurance or corporation tax to the test as they make up around three quarters of total government revenue.
Leftwing commentators have weighed in with ideas on the possible tax options available to Reeves. Former Labour Party leader Neil Kinnock suggested adding a two per cent wealth tax to assets worth more than £10m.
Government ministers squashed rumours as business secretary Jonathan Reynolds called wealth taxes “daft”. It also increased some existing wealth taxes at last year’s Autumn Budget, including capital gains tax.
But officials have been silent on a number of other possible tax hikes while reports have emerged in several newspapers of options it was considering.
The tax targets Rachel Reeves has in her sights vary between savers, investors and businesses.
These are the tax hikes thought to be top of Reeves’ list. Click below to scroll to each section.
Pensions
Rumours swirled ahead of last year’s Autumn Budget that Rachel Reeves could raise £10bn a year by reducing tax breaks for Brits making pensions contributions.
A Labour Party-affiliated think tank, the Fabian Society, said the Chancellor could introduce a flat rate of tax relief for individual and employer pension contributions for all tax bands.
Under the current system, tax relief on pension contributions is provided at a marginal rate of income tax. Basic rate taxpayers who would have otherwise paid 20 per cent taxes on income get the same rate of relief on cash moved into pension pots.
Setting a flat rate above the basic rate of 20 per cent would allow lower earners to pay more into pension pots and simultaneously force higher earners to pay more into the government’s coffers when they make pension contributions.
Labour dropped the plans over fears public sector workers on modest incomes would have to pay more tax.
The government could also lower the lump sum allowance of £268,275 for 25 per cent of funds taken out of defined contribution (DC) pension pots for over 55-year-olds.
The return of the pensions commission, which will “explore the long-term questions of adequacy and retirement outcomes”, could bring these questions into focus, with tax hikes likely to be designed in the guise of “fairness” and a more distributive approach to wealth.
There are other ways it could target pension pots. The lifetime allowance for pensions, which was a limit on the total amount of pension savings an individual could build up in a scheme without getting taxed, was abolished in Jeremy Hunt’s last Budget, and could be brought back by Labour.
But pensions are a complex business for a government to interfere with given the high risk of unintended consequences.
Working people…by stealth
Labour ministers have emphasised they would not raise taxes on “working people”.
Top think tanks including the Institute for Fiscal Studies have suggested the government could feasibly get away with claiming it was not betraying manifesto commitments by extending a freeze on income tax thresholds, which could raise more than £9bn.
Freezing income tax bands is often referred to as a “stealth tax” or fiscal drag, with millions more pensioners likely to start paying income tax if thresholds remain unchanged.
At last year’s Autumn Budget, Rachel Reeves said personal tax thresholds would be uprated in line with inflation from 2027.
Tax bands have been frozen since April 2021.
Keir Starmer has not ruled out extending stealth taxes while ING economist James Smith has said such a move was “low-hanging fruit” for the government.
OBR analysis has suggested around 3.5m individuals will have to pay taxes at a higher 40 per cent rate by 2029 while 600,000 more people would have to move into the additional 45 per cent band.
Some 4.2m people will also have to start paying income tax, the fiscal watchdog’s report suggested.
Gamblers
Former Prime Minister and Chancellor Gordon Brown weighed in the tax debate with a proposal to target gamblers.
With the backing of the progressive think tank Institute for Public Policy Research, he argued increasing levies on online casinos and slots machines to 50 per cent could get the Treasury an extra £3.2bn.
Tax experts suggested the planned increase would not yield as much revenue as the IPPR reported while industry giants have previously said jobs would be lost as a result of costs being added.
Sports and cultural events could be disproportionately hit by more taxes on betting.
The British Horseracing Authority has said a £300m hit by a tax on racing bets could put thousands of jobs at risk.
‘Sinners’
Economists at Pantheon Macroeconomics believe Rachel Reeves will go further in its sin tax raid, with gambling duties being just one part of the equation.
Beyond consultations on proposals to tax bets on racing, the government is also exploring including milk-based drinks under wider sugar taxes.
Milkshakes and lattes would be taxed in the same way soft drinks are.
Some duties rise with inflation but Rachel Reeves could move to raise taxes beyond price growth in response to calls from leading health groups including Diabetes UK.
The Institute of Economic Affairs (IEA), a free market think tank, has described sin taxes as regressive, given it can disproportionately hit lower income Brits, and a “dramatic failure” due to a rise in obesity rates among children.
And spenders
The other option for the Treasury would be to simplify value-added tax (VAT) exemptions.
The IEA’s Tom Clougherty and Jon Moynihan, a Conservative life peer, have argued that broadening VAT to products in line to averages seen across major global economies would simplify the tax system and raise billions of pounds more for the Treasury.
The classic example of an apparent contradiction is between cakes and biscuits, which led to a 1991 legal dispute around Jaffa Cakes on what food can be zero-rated when it is covered by chocolate.
This could be politically toxic for Labour given its manifesto commitment not to hike VAT.
Some government ministers, including Treasury secretary Darren Jones, have spoken about a commitment not to raise “headline” rates.
It would suggest that Treasury officials are considering looking over increasing taxes on goods.
It has been argued that lowering VAT rates and reducing the turnover threshold for businesses of £90,000 while broadening the range of products taxed could still bring higher revenue for the government.
Jaffa cakes are exempt from VAT | Image via Getty
Grieving families
Rachel Reeves is looking at ways to get more cash from inheritance tax, with reports suggesting she is considering introducing a lifetime cap on the amount of money or assets an individual can donate to family members before it gets taxed.
A source told The Guardian said the Treasury had to “look at the levers for taxing wealth” if it wished to avoid taxing earnings from people’s work.
A tax on gifted payments would likely lead to a change in taper relief, in which tax rates on gifts made seven years before someone dies rise in the seven years leading up to the date of their death.
James Ward, head of private client practice at the law firm Kingsley Napley, said one unintended consequence of taxing gifts could be younger generations receiving less cash from the Bank of Mum and Dad.
There is little suggestion of how much revenue would be earned from a change to how donations are levied.
Investors
The government has championed investment pledges made by private companies in the UK and reports suggest it could introduce an investor visa to support its industrial strategy.
But off the back of criticism of dividends paid out to the bosses of Thames Water, The Sunday Times reported the government was considering increasing the 39 per cent tax rate on dividends or removing a £500 allowance.
Some changes could bring an extra £325m in revenue for the government.
But it has been warned that efforts to boost investment would be undermined if dividends were targeted.
Deputy prime minister Angela Rayner has reportedly argued for inheritance tax relief on AIM shares to be removed, which could raise up to £1bn, and closing loopholes for commercial property stamp duties.
Banks
In July 2015, then Chancellor George Osborne introduced a new bank surcharge which would see profit taxed at a supplementary 8 per cent charge on top of corporation tax.
When Jeremy Hunt was Chancellor, he cut the surcharge to a three per cent rate at the same time as he raised the general rate of corporation tax to 25 per cent.
Reports have suggested that Reeves could target banks with a higher surcharge rate, raising hundreds of millions of pounds.
A separate 38 per cent levy on bank profits, which would mirror a similar windfall tax on energy profits, could raise £11bn, according to research by Positive Money.
Top banking bosses have hit back at proposals, with NatWest’s chief executive Paul Thwaite claiming “strong economies need strong banks”.
Lloyds’ Charlie Nunn has argued increasing taxes would dent growth while HSBC’s Georges Elhedery said additional taxation would lessen banks’ ability to invest.
Businesses
Employers were the most affected group after last year’s giant £20bn tax raid on national insurance contributions (NICs).
The Chancellor’s decision to increase the rate on employers’ NICs to 15 per cent while lowering the salary threshold from £9,100 a year to £5,000 has damaged the UK jobs market, limited investment and made inflation stickier after costs were passed on to consumers in the form of higher prices.
Keir Starmer thanked business chiefs for taking on the taxes at a business conference in June -but British Chambers of Commerce director general Shevaun Haviland urged the government not to inflict more taxes on businesses at the same event.
Rachel Reeves has faced intense pressure and lost trust with many business leaders over the £20bn tax hike – but reports suggest she could be coming back for more.
The Labour Party-affiliated think tank Fabian Society called on the government to make more employers pay into a nationwide apprenticeship budget and to demand larger employers pay a higher levy.
Property owners also fear business rates could spike, with businesses on larger premised to be charged more to reduce rates paid by smaller stores.
Online retailers may also be targeted at the Autumn Budget.
Business rates are paid to local authorities along with council tax, leaving the government limited power to make use of funds under current rules.
Motorists
Speculation grows every year on whether the Treasury will get its win in unfreezing fuel duty.
The main rate of fuel duty has been 52.95 pence per litre since 2011, with a 5 pence cut introduced in 2022 to tackle high energy prices after Russia’s full-scale invasion of Ukraine was launched.
That 5p cut has been maintained in Budgets since then, with the deadline for its expiry scheduled for March 2026.
Because the cut is seen as temporary, the OBR has not scored the cost of maintaining it.
Campaigns by motorists across the UK have been successful in convincing the government petrol prices would become more expensive if the headline rate is increased and the 5p cut is abolished.
Fuel duty is a big earner for the government, with it expected to receive over £24bn this year from the tax.
Rachel Reeves said last year unfreezing fuel duties would be the “wrong choice” though left-leaning think tanks have suggested the policy does not square up with Labour’s net zero ambitions.
Rachel Reeves said unfreezing fuel duties would be the “wrong choice”
Immigrants
Most employers have to pay an additional immigration skills charge if they take on skilled workers.
This tax came into effect at the same time as the apprenticeship levy in 2017, with former Chancellor George Osborne claiming it would boost training for British workers.
In Labour’s immigration white paper, ministers pledged to add a 6 per cent levy on international student fees.
The funds would be re-invested into higher education and skills systems.
But economists have published more research on the impacts some immigrants can have on public finances, with the Migration Advisory Committee finding that foreign nationals on spousal visas were a drag on UK taxpayers.
The OBR’s David Miles wrote about “serious problems” in the UK’s reliance on importing workers.
With immigration being a top voter concern according to polling, the government could explore hiking visa fees, increasing charges on immigrants who use the NHS and payments for applications on settlement and indefinite leave to remain.
Tightening migrants’ access to the welfare system, a policy which is reportedly supported by deputy prime minister Angela Rayner, could also save the government hundreds of millions of pounds.
HMRC reforms
Tax policy introduced by Rachel Reeves could involve deeper reforms of HMRC itself.
At this year’s Spending Review, the government unveiled plans to invest £500m in the taxman by building digital systems, improving efficiency through AI and moving more customer interactions online.
The government has also previously pledged to crack down on “tax dodgers” and fraud, as well as recover earnings from Covid contracts.
HMRC’s improved compliance yield from wealthy taxpayers meant it increased revenue by £3bn between 2020 and 2024.
But the current tax gap, which shows the difference in tax expected from total consumption to actual receipts, hit £46.8bn in the 2023-24 financial year.
It means HMRC did not collect over 5.3 per cent of the total tax it was due, with missed corporation tax and capital gains tax making up the majority of the gap.
Fiscal rules
Some economists have called on Reeves to rewrite her fiscal rules.
The International Monetary Fund (IMF) said Reeves should look at ways to revise her fiscal rules to limit OBR forecasts to a once-a-year event, which would stop her from making snap decisions on short-term savings.
A briefing by the Institute for Fiscal Studies (IFS) instead suggested Reeves could bring forward a rule set to come in spring 2027 that would allow her to build in a deficit worth 0.5 per cent of GDP on a rolling three-year forecast period.
Analysts believe this rule could allow her to build £17bn in headroom although such a move could spook bond markets and represent a big U-turn on her “non-negotiable” rules.