In the run-up to the mother of all Autumn Budgets to be delivered by Chancellor Rachel Reeves this week, tax rumours have run wild, infecting the minds of businesses and working Brits while adding to the sense of peril that a botched fiscal event could bring.
Investors are running scared. Voters fear looming betrayal. Gamblers are punting on the worst outcome. The UK economy has been slowed down by a “fiscal fandango”. Labour backbenchers are making nefarious plans to oust the Chancellor, or even the Prime Minister.
Starmer, Reeves and Downing Street strategists are bracing themselves for the wrath of backbenchers, newspaper front pages, lobbyists, academics and celebrity campaigners. It won’t be possible to please them all.
Only the bond markets appear to have their backs, yet one wrong move could see traders turn against the government.
By now, the Budget will have been signed off, pending a few adjustments in annexes and footnotes. Economists at the Office for Budget Responsibility (OBR), the fiscal watchdog whose forecasts conclude whether Reeves has met her fiscal rules to balance day-to-day spending with tax receipts by 2029/2030, are bracing for a bi-annual dose of intense scrutiny.
Should pensions minister Torsten Bell and economic adviser Minouche Shafik’s vision be adopted by the Treasury, the upcoming Budget could be one of the most totemic moments of Labour’s time in office.
Business chiefs are nervous
Business groups, meanwhile, will hope some of their demands for changes to training levies, benefits reform, deregulation and technology are taken on by the government.
Reform UK and the Conservative Party have offered their alternative proposals. Nigel Farage has called on Reeves to cut support to immigrants and the Tories have called on deep cuts to public expenditure, starting with welfare.
The best that analysts have been able to do, meanwhile, is come up with estimates for the fiscal hole facing Reeves and what decisions she will make on 26 November.
Having reported on the twists and turns for weeks, and drawing on analysis from economic consultancies, think tanks and analysts at banking giants, City AM has devised a probable scorecard for the upcoming Budget.
Reeves’ headroom destroyers
Productivity and growth downgrades
Reduction: £10bn – £20bn
The Treasury relies on the OBR’s forecasts to set its tax and spend targets, and critics have long warned that the body’s assessment of economic productivity – a key measure – is over-optimistic.
Reports suggest the OBR is going to downgrade its productivity assessment – based on output per hour – by around 0.3 percentage points.
Reeves may hope that some Budget policies around innovation, planning reforms and energy costs could help to boost growth forecasts.
Some of those policies may add to costs in OBR forecasts but could have the benefit of lessening the hit of damaging productivity downgrades.
Other policies announced since the Spring Statement could persuade the OBR to keep growth forecasts higher. This includes trade deals struck with the US and India, pension “superfund” reforms, deregulation in the City and tech deals. But measures in the Employment Rights Bill combined with sluggish housebuilding and poor growth data may have adverse effects.
A 0.1 percentage point decrease would anyway be brutal. The Institute for Fiscal Studies (IFS) said each percentage-point downgrade will incur around £7bn extra public sector net borrowing, bulldozing Reeves’ £9.9bn fiscal headroom.
Welfare u-turns
Reduction: £6bn
U-turns over welfare spending decisions will come with a £6bn price tag at this month’s Budget, according to Oxford Economics.
This cost includes the Government’s commitment to give winter fuel payments to nine million pensioners after campaigners and Labour members made their exasperation with its initial scrapping clear to the government.
This £6bn also accounts for the cost of the climbdown over planned welfare cuts after a backbench rebellion.
Treasury Select Committee chair and Labour MP Meg Hillier was a key opponent to welfare spending cuts earlier this year.
Debt interest costs
Reduction: £4bn
Rising interests on government bonds will add £4bn to projected government spending, according to Oxford Economics.
The government borrows money by selling bonds to investors – known as ‘gilts’ due to the pieces of paper literally having a gilded edge, one upon a time.
The cost of gilt yields – the sum exchanged for these bonds, plus any interest payments – increases as these bonds become less popular, which happens when investors lose confidence in the UK economy.
The OBR said in March that borrowing costs to the government’s lenders in the bond markets would cost more than £110bn this year, more than twice the defence budget and near the total spent on education.
Gilt yields recently hit their highest level this century, but have begun to fall in the last month, leaving Reeves with hope that the OBR will deliver a lower-than expected debt interest assessment.
However, the OBR could also decide that Budget measures lead to greater market volatility, leading them to upgrade borrowing cost projections.
Building more headroom
Reduction: £5-10bn
At last year’s Budget – which Reeves marketed as a one-off tax-raising measure to restore stability – the Chancellor left a £9.9bn buffer to cushion the public finances against volatile markets.
A decision to maintain it at the same level at the Spring Statement prompted analysts at American bank Jefferies and the economist Paul Johnson, formerly of the IFS, to predict incoming tax increases.
Analysts are urging the Chancellor to carve out more breathing space at this month’s Budget, and Treasury figures are said to be pushing for more headroom from within No. 11.
Reeves’ £9.9bn headroom was the third-smallest of any chancellor since 2010, and the Institute for Government said this “razor thin” buffer means the Chancellor is forced to adjust to every new forecast from the OBR.
Some are calling for Reeves to create a buffer of at least £20bn, but this would require heavier tax rises.
Reeves has herself said she would build a larger headroom to “absorb shocks” and try to avoid another repeat of tax rises next year.
Scrapping two-child benefit cap
Reduction: £3.5bn
Following months of uncertainty, recent interventions by Reeves and Prime Minister Keir Starmer mean it appears likely the two-child benefit cap will be scrapped at the Budget.
Allowing benefits to be claimed for an unlimited number of children would cost between £3.4bn and £3.5bn, according to the IFS.
Reeves could also look to introduce a tapered system based on a report by the Resolution Foundation.
The left-leaning think tank has set out a slate of half-measure options for Reeves, such as exempting families with a disabled child (which would cost only £1.2bn), introducing a lower benefit payment for the third child and beyond (£2.3bn) and scrapping the cap just for families with at least one working parent (£2.6bn).
Cutting VAT from energy bills
Reduction: £2.5bn
The government is expected to strip VAT from household electricity and gas bills, which will cost £2.5bn according to Pantheon Macroeconomics.
Household energy bills are currently subject to 5 per cent VAT, with much of the tax being paid by consumers rather than providers.
Energy Secretary Ed Miliband hinted at the measure last month, but refused to confirm it.
The policy could strip around 0.15 percentage points off headline inflation, Barclays estimates have suggested.
Tax breaks for innovators
Reduction: £1bn
Reeves is reportedly considering tax breaks for innovators which would cost just under £1bn, but could deliver between £6bn and £10bn in productivity returns.
In 2023, then-chancellor Jeremy Hunt changed expensing rules for investment to allow businesses to claim back £250,000 on corporation tax for every million spent on new equipment.
An expansion of this relief to cover purchases of intellectual property, such as patents and licenses, is said to be under consideration.
The government could also expand the enterprise management incentive (EMI) scheme that offers tax-free share options to employees at early-stage startups.
NHS England redundancies
Reduction: £1bn
Health Secretary Wes Streeting has called for an extra £1bn in Treasury cash to cover mass redundancies at the quango NHS England.
This emergency allowance should be closer to £3bn to account for strike action and higher drug prices, according to the NHS Foundation.
Rachel Reeves, however, has reportedly rejected the health secretary’s calls, so it is unlikely that this cost will factor in her Budget.
Headroom destroyersReductionProductivity downgrade£10bn – £20bnWelfare spending £6bnExtra borrowing costs£4bnBuilding more headroom£5bnScrapping two-child benefit cap £3.5bnCutting VAT from energy bills £2.5bnTax breaks for innovators £1bnTotal needed in extra tax revenue or spending cuts£32bn – £42bn
Headroom builders
Threshold freeze ‘stealth tax’
Addition: £10.4bn
Income tax and national insurance thresholds are frozen until 2028, in a so-called “stealth tax” which raises money for the Treasury as inflation drags workers into higher tax brackets. At her first Budget, Reeves vowed to unfreeze these thresholds by the end of this parliament, rightly calling the move a tax on workers.
However, following last week’s U-turn over a previously-expected 2p hike to the rates of income tax, a further freeze to thresholds has become more likely.
Reeves would extend the freeze on both taxes until 2030, which would raise an extra £10.4bn according to IFS.
The total amount in gains scored by the OBR will largely hinge on fiscal forecasts, particularly around wage growth and inflation.
Michael Saunders, senior advisor at Oxford Economics, said: “We regard a freeze in income tax allowances and NICs thresholds a near certainty.”
Mansion taxes
Addition: £6bn – £7bn
The Treasury is considering introducing a ‘mansion tax’ to target those with the “broadest shoulders”. Reeves has reportedly told MPs that the mansion tax is a certainty in next week’s Budget.
Various options to trigger a mansion tax have been on the table, including doubling the council tax rate charged to the top two bands of property or ending the capital gains tax exemption on properties above a certain value.
But Reeves has reportedly committed to a council tax surcharge on properties above a certain value, and is urging MPs to bill this measure as a tax on those with the “broadest shoulders”.
Houses over a certain value, such as £1.5m, would face an additional 1 per cent tax on the value above that level, meaning a home worth £2m would have to pay an extra £5,000 a year on top of its existing council tax.
Reeves will announce a revaluation of 2.4 million of the most valuable properties across bands F, G and H over the next few years – representing one in 10 English homes, according to The Telegraph.
It is unclear how much property taxation reforms could raise given the uncertainty around how Reeves may fiddle with thresholds and surcharges.
The IFS has estimated that a new surcharge on the two highest bands could raise £4.4bn.
Meanwhile, Capital Economics analysis has suggested that introducing capital gains taxes on primary residences valued above £1.5m would raise an extra £2bn.
Landlord tax
Addition: £2.2bn
One of the key proposals in the Resolution Foundation’s expansive report on the UK economy when pensions minister Torsten Bell was in charge of the think tank was to levy national insurance on landlords.
The suggestions of an extra tax on earnings made by property owners has already faced widespread criticism.
Reeves rejected the proposal at last year’s Budget but it could feature this year to fill a fiscal hole and target the wealthiest people in the UK.
Treasury minister Torsten Bell has led calls for landlords to be taxed. Jordan Pettitt/PA Wire
Reducing the tax gap
Addition: £5bn
The total tax gap, the difference between the amount that should be paid to HMRC based on official spending figures versus what was actually paid, in the last financial year was nearly £47bn.
Tax officials have said that around three fifths of the gap comes due to unpaid taxes across small businesses.
In the Spending Review, Reeves announced upgrades in the budget for HMRC in order to improve compliance across the department.
This will include adding some 8,000 new staff to close the tax gap by some £7.5bn.
Acting as a watchdog on government claims, the OBR could take a more moderate view of how much more tax intake could be made from boosts to HMRC operations.
Economists have suggested that there could be a £5bn improvement to tax revenue forecasts as a result of the change made since the OBR last published a fiscal forecast.
Road tax on electric cars
Addition: £2bn
The government is set to hit drivers of electric vehicles with a new pay-per-mile tax in the Budget.
The levy will charge drivers 3p per mile on top of other road taxes, resulting in an extra cost of £250 per year.
The government is attempting to present the tax as a fairness measure, as drivers of petrol cars pay an average of £600 per year through fuel duty.
A government spokesperson appeared to confirm the tax, telling The Guardian: “Fuel duty covers petrol and diesel, but there’s no equivalent for electric vehicles. We want a fairer system for all drivers.”
Capital Economics has measured the total gains for the Treasury to come in at just short of £2bn, though it could be higher depending on the per-mile charge imposed on vehicles.
Clampdown on salary sacrifice
Addition: £2bn
Reeves is reportedly eyeing up a clampdown on salary sacrifice schemes which allow workers to divert earnings into their pension pots.
In a move which could raise up to £2bn per year, the Chancellor will reportedly cap national insurance exemptions for diverted income at £2,000 annually.
This could cost six-figure earners up to £50,000, and has been described by critics as a stealth tax on pensions.
Spending cuts in the last year of forecast period
Addition: £2.8bn
In times of despair, Chancellors have tended to look at finding savings in future years to avoid more imminent political controversies on public expenditure.
Rachel Reeves has already delivered her Spending Review, freezing in departmental budgets for years up until 2029, the year the next General Election is due.
While she could renege on promises made to her colleagues in the Cabinet, she could also turn to finding savings in the last year of the OBR forecast, which is also the year that is crucial for her fiscal rules.
In the financial year 2029-2030, day-to-day spending across the government is forecast to increase by 1 per cent in real terms.
Reeves could opt to halve the increase – meaning departmental spending increases by 0.5 per cent instead – in order to deliver quick savings and help plug her fiscal hole.
The IFS said this cut could deliver £2.8bn in extra saving while no real terms increase to departmental budgets would save the Chancellor up to £5.5bn.
Gilt traders have told City AM they would not see this cut as a credible fiscal policy to control spending.
Motability scheme tightened
Addition: £1bn
Reeves is reportedly gearing up a £1bn savings package through cuts to the Motability scheme offered to disabled people.
The savings could be made through ending VAT and insurance premium tax reliefs offered under the scheme.
Reeves could also restrict which benefits recipients are eligible for free cars but those reforms could take longer to be introduced.
These savings would be marginal in the context of the fiscal hole awaiting Reeves but it would come in line with her bid to make the system fairer.
Benefit fraud crackdown
Addition: £1bn
The government has made a few pre-Budget announcements, among them a push to clamp down on welfare fraud across the system.
It has claimed that £1.2bn of saving will be made by 2031 through a targeted scheme aimed at reducing error across the welfare system.
The announcements are the first set of Budget reforms signalling the government’s intention to take control of higher welfare spending.
Gambling taxes
Addition: £2bn
If there was one shoe-in for the Budget, it would probably be a wave of new gambling taxes.
There have been months of speculation of how Reeves will increase levies on game slots and online casinos. After intense lobbying, it has been reported that horseracing could be spared from tax hits.
The move could also be unpopular given The Sun launched a campaign to stop Reeves from hitting betting shops.
The left-leaning IPPR’s proposals would see varying tax rates on online gambling, machine games and general betting be levied at the same rate, potentially up to 50 per cent.
Figures around the addition to revenue have varied but Reeves could aim to raise around £2bn.
However, the OBR warned in the middle of the year that its forecasts for higher sin taxes had frequently been overestimates, suggesting it could take a harsher view on projections.
Alcohol and tobacco duty taxes
Addition: £600m
Last year, alcohol duty rates for bottled beer, wines and spirits increased by RPI inflation.
It has been reported that the rates could increase via the same reading – which was 4.5 per cent in the year to September – for the second consecutive year despite intense campaigning from Scotch whisky makers and other industry officials.
Capital Economics has estimated that a five per cent increase in alcohol and tobacco duty would raise just £600m, so the gains from a new tax raid could be negligible.
Pubs could be hit by a fresh sin tax raid.
Milkshake tax
Addition: £100m
The Treasury is set to reach its conclusion on its proposal to expand the soft drinks levy, widely known as the sugar tax, to milk-based drinks.
It has also been suggested that the Chancellor could cut the threshold from 18p on drinks containing 5g or more of sugar per 100ml to 4g per 100ml.
The Treasury is expected to raise negligible amounts but this sin tax is seen as a way to push people to choose healthier options, such as smoothies.
Dividend tax
Addition: £2bn
The Government is considering tax hikes on investors which could raise £0.4bn, according to the IFS.
Off the back of criticism regarding dividends paid out to Thames Water bosses, it was reported the Treasury is looking into increasing the 39 per cent tax rate on dividends or removing the £500 allowance.
This would bring an extra £325m in revenue for the Government.
Alternatively, the IFS estimates that a one per cent increase on all rates of income tax on dividends would raise a similar amount, with expected tax receipts at £0.4bn.
The Telegraph, however, estimated hikes to rates of tax on dividends could raise as much as £2bn.
The paper also reports Reeves could also be eyeing a cut to the tax-free allowance for earnings from dividends, which could raise around £70mn a year.
Uber tax
Addition: £1bn
An all-out war has broken out between black cabbies and private hire businesses including Uber and Bolt on the advantages enjoyed by a reduced rate of VAT under the Tour Operators’ Margin Scheme.
Uber officials have called suggested plans to close the loophole a “taxi tax” while drivers of black cabs have claimed that the Treasury is losing out on £1bn due to the loophole.
It could be seen as a policy to level the playing field but, in a Budget aimed at lowering the cost of living, operators have argued that the scheme would lead to fares rising “dramatically”.
Remove AIM relief
Addition: £1bn
At the height of summer tensions around the government’s welfare reforms, a series of tax proposals made by former deputy prime minister Angela Rayner made their way into national newspapers.
One such measure included removing the inheritance tax relief offered on AIM shares in the London Stock Exchange’s junior market.
Out of all the proposals presented to Reeves, this could be the most attractive.
Some tax experts have backed the end of the relief, including Dan Neidle.
The end of the relief could claw back some £1bn for the government, according to analysts at Capital Economics and other research firms.
Headroom buildersAdditionStealth tax£10.4bnMansion taxes£6bn – £7bnLandlord tax£2.2bnSalary sacrifice cap £2bnSpending cut £2.8bnEnd of Motability scheme reliefs £1bnBenefit fraud crackdown£1bnRoad tax£2bnDividend tax£2bnSin taxes£2.5bn – £3bnUber tax£1bnReducing tax gap£5bnRemove AIM relief £1bnTotal added£36.9bn – £40.4bn
Other Budget policies
Growth and skills levy expansion
Business groups have called on the Labour government to deliver on its manifesto pledge to expand the growth and skills levy beyond apprenticeships and to training.
Industry chiefs have said that the current system is not flexible enough for firms to make use out of available funds.
Research has shown that investment in training has fallen by some £10.9bn since the apprenticeship levy was introduced.
The reforms could be seen as growth-inducing and boosting the labour market, particularly in a time when the government has clamped down on migration of skilled workers.
Business rates reform
Reeves is set to announce plans on “fixing” cliff-edge business rates that make small businesses pay higher taxes upon opening a second property.
In a sweep of changes to the complex high street tax system, the government is expected to introduce a marginal tax rate system as opposed to the current “slab” system where a single multiplier tax is paid on the full value of properties.
Firms face lower tax rates for retail, hospitality and leisure properties with a rateable value of less than £500,000, Those above the threshold pay at a rate determined by a higher multiplier to encourage investment.
But reform to business rates could come as a method to raise revenue, with bigger businesses likely to be targeted.
The new rates for businesses will be set at this year’s Budget. The Treasury has indicated that reliefs for businesses with properties at a rateable value of less than £15,000 could be changed.
This would follow a long period of consultation that has been widely welcomed by business groups.
This may not be a revenue-raising exercise while effects on revenue will have to be scored by the OBR.
ISA reform
Reeves is widely expected to move ahead with ISA reforms in her next move aimed at ensuring the government takes on fewer costs for covering saving pots which enjoy tax-free interest on savings.
The policy is also aimed at getting more Brits to invest in stocks and shares through the specialised ISA for capital markets and investment. It would come in tandem with an advertising campaign to get savers to back companies listed in the London Stock Exchange.
But consumer affairs experts including Martin Lewis and the Treasury Select Committee have urged Reeves to steer clear from lowering the annual allowance from £20,000 to £12,000.
North Sea oil and energy levy reforms
Slammed by the Trump administration for sky-high energy prices, business groups for the lack of support in the push to net zero and households facing higher inflation levels than cousins living in other advanced economies, the government is facing intense pressure to take a more direct approach on energy costs.
The government is constrained by its commitment to banning new oil and gas licences across the North Sea and other key targets, including making some 95 per cent of the national grid made up of clean power.
Business leaders and economists have called on the government to scrap the windfall tax on energy giants including Shell and Ithaca.
It has been suggested that the windfall tax could end earlier than expected after it was extended to March 2030 in last year’s Budget.
It is unclear on whether this would sway tax revenue forecasts by a significant margin and will be duly analysed by the OBR.
Reeves could also slash funding for energy-efficient homes to pay for a reduction in energy levies included in the Ofgem price cap, according to reports.
North Sea oil firms have called for windfall taxes on profits to be scrapped.
The rabbits – and other possible surprises
Every Chancellor likes to pull the rabbit out of the hat.
Rachel Reeves will go into the Budget hoping to catch the media, Labour backbenchers and her critics by surprise by announcing more growth-focused policies.
But she also risks disappointing some with more damaging proposals not floated out in the weeks leading up to the Budget.
Stamp duty reform
Reeves has made house-buying and boosting home ownership central to her efforts to drive growth in the UK economy.
Her Leeds Reforms this year included sweeping regulatory changes that could allow lenders to offer mortgages at more than four times a borrower’s income.
The government has also held firm on its pledge to build 1.5m homes despite considerable pressure in the construction sector.
The main way that Reeves could free up the housing market in the short term, according to leading economists of different political colours, would be to scrap the stamp duty.
It was reported in the summer that Reeves could replace the stamp duty, which is a tax paid on the point of purchase of new homes, with a new levy on property.
The Tories have pledged to scrap the stamp duty on primary residences, adding to the pressure faced by Reeves to remove the unpopular tax.
Treasury officials have discussed the option of making the stamp duty a staggered payment covered by a government loan, City AM revealed earlier this year.
Wide-scale reforms to council tax rates and property levies have been ruled out, according to recent reports.
The other transaction tax which makes fewer newspaper headlines but dominates conversations when City professionals speak about boosting capital markets is the 0.5 per cent stamp duty on shares.
It has been reported that the government could exempt newly-listed company shares on UK capital markets from the stamp duty for a limited time period of around two or three years as part of a bid to make the country’s investment hub more competitive.
Bank surcharge
Both the Liberal Democrats and Reform UK have highlighted the gains that commercial banks have made from the Bank of England’s complex quantitative tightening (QT) process that has now led to the Treasury incurring losses.
Think tanks have urged the government to add levies on banks to claw back some of the profit made by big banks operating in the UK.
The current surcharge on bank profits is 3 per cent, having been lowered from its peak 8 per cent rate two years ago.
There have been conflicting reports on whether Reeves could include a bank tax in her statements.
Some reports have suggested that Reeves wants to avoid targeting banks at the Budget but the current pressures on public finances, and the public’s skepticism about City giants making profits in times of economic hardship, could sway the Chancellor to find £2bn more in raising the surcharge.
Immigration policies scored
In the week before the Budget, home secretary Shabana Mahmood has been busy rolling out a long list of changes to the UK immigration system.
It includes easing rules of higher rate taxpayers and ensuring that migrants who have arrived since 2021 can only claim settled status if they are net contributors to the state.
There are also a number of other reforms aimed at making the UK less attractive for asylum seekers planning to cross the English Channel on a small boat.
They add to a number of policies announced in the government’s white paper on immigration unveiled in May, which included increasing the salary threshold to £41,700 for skilled worker visas.
Mahmood said in no uncertain terms that her measures were designed to boost growth.
So, it now falls to the OBR to assess whether the changes, which fundamentally change the look of the UK labour market, generate higher returns for the government than the previous system.
The OBR has faced criticism over its assessment of how high net migration has contributed to growth in the UK, so there will be greater scrutiny of how it scores Labour’s sweeping policies.
Given the policy proposals laid out by the government are relatively fresh and have not reached final legislation in parliament, the OBR may choose to look past reforms partly aimed at boosting tax receipts.
Welfare reforms
Traders in bond markets are looking for signs that the government is taking control of spending.
While welfare reforms similar to the £5bn cuts to disability payments seen in the Spring Statement are highly unlikely to be re-introduced, Reeves has already tried to deliver some indications that she will look to limit welfare spending over the course of the parliament in the lead-up to the Budget.
One such announcement has already been made on a crackdown on benefit fraud.
There could also be some £2bn savings to be made through changes to the unemployment benefit payments in a part of this year’s welfare bill that did not crumble under the pressure faced by Labour backbenchers.
Total savings depend on how the government will apply the change to unemployment benefit claimants after a consultation is set to end.
Reeves may also make remarks about the ongoing Timms review on disability payments during the Budget.
Any statement on the review will represent a deliberate effort to show that the government is willing to cut welfare spending in future statements.