The Chancellor will deliver her second Budget this autumn – it will be in late October or early November, although the exact date has not been released at the point of writing this. Slow economic growth and higher than expected inflation mean that the government needs to close an estimated spending gap of £40 billion. Despite a manifesto pledge not to increase income tax, national insurance (NI), or VAT, speculation is rife that tax rises are the only way the Treasury can raise the revenue it needs.
Ahead of the Budget, it has already been reported that the government could make changes to taxes paid by landlords, such as income tax, capital gains tax (CGT), and inheritance tax IHT).
The upcoming Budget follows the Spring Statement in April (a smaller fiscal update) and the Spending Review in June, which confirmed departmental budgets for the remainder of the current Parliament.
Is the Chancellor planning further tax rises?
The government needs to close a spending gap of approximately £40 billion, according to the National Institute of Economic and Social Research (NIESR) think tank.
The Labour Party pledged in their manifesto that they wouldn’t raise taxes for “working people” and, more specifically, that they wouldn’t increase income tax, VAT, or NI.
However, as part of her first Budget in October 2024, Chancellor Rachel Reeves announced £40 billion of tax rises, including changes to NI and CGT.
A commitment to increasing spending on defence and the NHS as part of the Spending Review, plus u-turns on pensioner and disability benefit cuts, mean that speculation over further tax rises is growing. According to the Treasury and the Institute for Fiscal Studies, tax rises later this year are ‘inevitable unless economic indicators improve’.
Whilst the Chancellor may stop short of increasing tax rates to honour the manifesto promise, she may tinker with thresholds, allowances, or other taxes such as IHT or CGT.
Income tax thresholds
One way the government could raise more money without increasing income tax is to extend the freeze on the tax thresholds. This is known as a ‘stealth tax’ as more people are dragged into higher tax brackets as wages rise.
Income tax thresholds are currently frozen until 2028-29. As part of the Autumn Budget 2024, the Chancellor said that income tax thresholds would start to rise again in line with inflation from the 2028-29 tax year. However, the Treasury may be considering extending the freeze to raise more revenue.
Tax rate increases
Although the government has ruled out tax rises for “working people”, modelling from HMRC shows just how much could be raised through income tax rate increases, a rise in the rate of NI paid by employees and an increase in the VAT rate.
The table below shows how much extra revenue the Treasury could make by increasing:
The basic rate of income tax from 20% to 21%:
2026-27: £6.9 billion
2027-28: £8.3 billion
2028-29: £8.2 billion
The higher rate of income tax from 40% to 41%:
2026-27: £1.6 billion
2027-28: £2.2 billion
2028-29: £2.1 billion
Class 1 NI payable by employees from 8% to 9%:
2026-27: £5.4 billion
2027-28: £5.3 billion
2028-29: £5.4 billion
The standard rate of VAT from 20% to 21%:
2026-27: £8.8 billion
2027-28: £9.2 billion
2028-29: £9.6 billion
Changes to the inheritance tax threshold
The government has already made a number of high-profile changes to IHT. This includes the move to include unspent pensions as part of someone’s estate and into the scope of IHT from April 2027.
Looking ahead to the 2025 Autumn Budget, one of the ways the Treasury could raise revenue is by reducing the £325k IHT threshold. This threshold, which is the point at which people start paying inheritance tax, has been the same since 2009. HMRC estimates that currently only four per cent of estates pay inheritance tax.
A lower threshold would mean a higher number of people would need to pay IHT at 40%, which could help to boost government funding.
Alternatively, the government could increase the 40% IHT rate. This, in itself, wouldn’t impact on the number of people who pay inheritance tax, but it would mean higher bills for those that do.
Landlords
Rachel Reeves and her team are looking at replacing stamp duty with a ‘national property tax’.
It’s been strongly rumoured that the Treasury is considering suggestions by the Onward think tank – removing stamp duty for buyers and introducing an annual tax for sellers.
The tax would be paid at 0.54 per cent by sellers of properties worth over £0.5m and 0.81 per cent by sellers of properties worth £1m or more. The new tax would be payable on owner-occupied properties after a sale. That’s all we know – how that works in practice is anybody’s guess!
It’s estimated that stamp duty is paid by 60% of buyers and a new tax on sales over £500,000 would only affect 20% of transactions. At this stage, reports suggest that stamp duty for second home buyers (including landlords) will remain the same.
Possible abolition of principal private residence relief
We’ve always known that, however much our principal private residence increases in value, we won’t have CGT to pay when we sell it.
However, CGT may be extended to high‑value primary homes above a certain threshold (£1.5 million has been mentioned), with rates of 18% for basic-rate and 24% for higher-rate taxpayers.
The thought of paying CGT on your family home is pretty alien. What this would do to the property market, particularly around the threshold level, is anyone’s guess.
NI on rental income
There has been quite a bit in the press about this over the past few days. Officials are reportedly considering charging NI on rental income, which could raise around £2 billion. However, this will have an adverse impact on rental supply and tenant costs, with private landlords already under extreme pressure. They have been battered from all angles over recent years.
CGT, investments and business reliefs
CGT rates could rise to align more closely with income tax bands. This was threatened at this time last year, prior to the 2024 Budget, but didn’t happen. However, the country is in a much worse state now than it was twelve months ago, so the 18% and 24% CGT rates could rise this time – maybe not for the disposal of residential properties, but for other asset disposals (such as shares and other investments). The annual exempt allowance (now just £3,000, down from £12,300 a few years back) may be reduced further.
Reform for business owners
The government may introduce a new allowance to support business owners when selling their companies, possibly replacing the current business asset disposal relief (BADR), which used to be called entrepreneur relief.
Alternatively, there may just be changes to BADR to include stricter qualifying conditions such as higher ownership thresholds, longer shareholding periods, or minimum age requirements.
If the current BADR is abolished and replaced with something new, there are no prizes for guessing that the new system will be less generous to business owners than the outgoing one!
Wealth tax
Some proposals include an annual wealth tax on assets above a certain threshold (£4-10 million has been discussed). Whilst extremely controversial, and complex to administer, this remains part of the discussion.
Reintroduction of the pension lifetime allowance
The lifetime allowance for pension contribution purposes was abolished in 2024. This placed a lifetime cap on your pension, restricting pension contributions as the cap was reached. The cap was £1.073m, and a similar cap could be reintroduced.
Reduction of the pension tax-free lump sum
This one will scare a few people. The current 25% tax-free pension lump sum may be capped (potentially at £75k or £100k) with all pension drawdowns above the cap subject to income tax. For comparison purposes, if you had £1m in your pension pot now, you could draw £250k tax-free and then only start paying tax on the remaining £750k as you pull it out.
Reforming pension tax relief
The government may consider moving to a flat-rate relief system, which could reduce advantages for higher earners but protect basic-rate taxpayers. Essentially, personal pension contributions get 20% tax relief for basic rate taxpayers and 40% tax relief for higher rate taxpayers. The government may look at something like 30% tax relief for everyone.
Tightening gifting rules
The Treasury may cap the total value of lifetime gifts or change the existing seven‑year rule for potentially exempt transfers. A tax on gifts paid at the time of transfer, rather than only at death, is being debated. At present, you can make a gift and, as long as you live for seven years after doing so, the value of the gift will not attract IHT when you pass away. This may change, so you might want to consider gifting assets sooner, rather than later.
Business rates and other SME impacts
- Larger commercial properties (over £500k) could face higher business rates, designed to target big retailers but potentially impacting high‑street businesses and pubs.
- Inflation‑linked business rates: from April 2026, business rates may rise in line with inflation, potentially increasing costs for many SMEs.
- ISAs and savings: there is speculation about reduced ISA allowances or new restrictions, though nothing has been confirmed.
- VAT on private healthcare: some reports suggest the government may consider extending VAT to private healthcare, though this remains unconfirmed.
Conclusion
Before becoming too depressed, please bear in mind that all of the above is, at this time, just speculation. I have tried to pull together rumours from a number of sources, just to give you a flavour of what may lie ahead.
Try to have a good weekend!
