Raising revenue with Rachel Reeves
The UK government is keen to avoid a repeat of the Truss administration’s financial meltdown, nor does it wish to drift into a France-style cycle of chronic fiscal imbalance. There is little political will to cut public spending or, as the left-leaning Resolution Foundation delicately puts it, there are “significant challenges associated with using spending as the main lever to address the shortfall.” We are therefore, in all likelihood, facing a significant tax-raising Budget on 26 November 2025. Income tax rises have been put on the table, and hastily removed again, with the Financial Times also reporting a similar story with tax hikes on partnerships. So, which areas might be affected once Labour have made up their minds?
A recent Office for Budget Responsibility (OBR) forecast puts the fiscal hole at around £20 billion, most of which must be filled by additional tax revenue. This excludes the government’s commitment to increase defence spending by roughly £10 billion over the life of this Parliament. Although the fiscal gap has narrowed over the past week, substantial tax increases and tighter finances remain unavoidable.
Hints of a fiscal tightening began to emerge in October, when the government suggested rebuilding its fiscal buffer through substantial tax rises. Gilt prices rallied and yields fell from 4.8% to around 4.4%, providing some vindication for this approach – a sign that markets were encouraged by the prospect of fiscal discipline. This didn’t last very long, however, as Reeves’ public retreat from her manifesto-defying plan to raise income taxes sent gilt yields soaring again.
Source: BBC News
Yields moderated after news of the better-than-anticipated projection from the OBR broke on Friday, but the sharp move is testament to the fragility of the fiscal situation in the UK. We continue to steer clear of longer dated UK government debt for this reason.
So, if not a hike in income taxes, where might the government look to raise revenue? Extending the freeze on income tax thresholds until April 2030 is a very likely outcome now that an increase in the tax rates themselves has been ruled out. This measure will go down more favourably than an income tax increase, but still breaks Labour’s pledge to unfreeze the thresholds from 2028. The government may seek to soften the blow through selective tax giveaways — for example, removing VAT on energy bills or eliminating the cap on child benefit in light of the OBR’s more optimistic projection.
Pension reliefs are also a likely target. The Chancellor could make pension saving less attractive for high earners by reducing tax relief on contributions to a flat rate of around 30%, which could raise over £10 billion — though it would be very complex to implement. A more likely measure is to charge National Insurance on salary sacrifice schemes which could raise about £4 billion.
The Financial Times reported on Friday that a mooted plan to make certain limited liability partnerships (LLPs) subject to employers’ National Insurance contributions had also been scrapped by the government. Currently, LLPs are exempt because partners are not classed as employees. Changing the rules might have raised nearly £2 billion, affecting around 200,000 high earners, mainly in London — a group unlikely to attract much public sympathy provided the government avoids taxing doctors’ partnerships.
Then there is the perennial discussion around a “mansion tax”. Proposals include introducing a new council tax band for high-value properties or capping the Capital Gains Tax exemption on main residences at £1.5 million (or for the top 5% of properties). Landlords could also face National Insurance on rental income, alongside new tenants’ rights, making the private rental market increasingly unattractive to investors.
If you enjoy beer, wine, gambling, cigarettes, or sugar, brace yourself — there could be further hikes in “sin taxes”. Collectively, these could raise around £3 billion. Despite these taxes often falling on lower income groups, they may prove politically expedient given the government’s fiscal constraints.
The increasing use of electric cars means that the revenue from fuel duty is gradually declining. To compensate, the Daily Telegraph has suggested the government could introduce a 3p per mile usage tax on electric vehicles. If implemented, it is likely to cost the average electric car user about £350 a year and raise about £1.8 billion a year. If introduced, it would look like a move born of desperation, and a removal of financial incentives to drive electric vehicles could slip into reverse years of planning towards a more environmentally-friendly future.
Raising taxes is electoral kryptonite, and governments usually try to push through such unpopular measures at the start of their term, not in the second year. The government has recognised that returning to the Dispatch Box with income tax increases, and breaking an election pledge in the process, would have been regarded as an unnecessary own goal. Yet the heightened sense of uncertainty lingers, and the flip-flopping and U-turning do little to instil confidence – it is no surprise to see speculation over the Prime Minister’s future.
Speculation around a second big tax raising budget has been undermining confidence in the UK and holding back growth. The government will hope to move beyond this budget with its finances on firmer footing, able to concentrate on its growth agenda going forward. This, though, will require luck and spending discipline, something that has been in short supply at Number 10 for the last decade or so.
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