Westminster is currently in a bit of a holding pattern ahead of next week’s Budget, a bit like an audience that has taken its seats but is waiting for the curtain to rise.
For weeks there has been feverish speculation about, and ‘kite flying’ of, possible tax rises which could feature in what is likely to be one of the most significant Budgets of modern times.
The current view is that when Rachel Reeves stands up in the Commons next Wednesday (26 November) she will outline a “smorgasbord” of different tax measures, rather than a single, big revenue raiser such as an income tax rise.
The latter had been the expectation after Rachel Reeves appeared to lay the groundwork for it. But the Treasury has since dropped plans to increase income tax rates (a move which would have broken Labour’s general election manifesto), following a better than anticipated forecast for the economy.
Labour sources have told The i Paper that decision-making about what to include in the Budget is going down to the wire. Here is what is most likely to be in it:
The ‘black hole’ Reeves has to fill
Reeves is having to raise taxes again because of the Government’s self-imposed fiscal rules, which states that day-to-day government spending must be covered by tax revenues by 2029-30, and that debt should be falling as a share of the economy by the same date.
She needs a certain amount of ‘headroom’ to keep her rules on track against the day-to-day buffeting of the economy. Last year she left herself £9.9bn and this did not prove to be enough.
U-turns on things such as cuts to winter fuel payments and benefit reforms, plus an expected deterioration in several key economic indicators since the spring, have all left Reeves with a ‘black hole’ to fill in the public finances.
The size of that hole is between the Government’s official forecaster, the Office for Budget Responsibility, and the Treasury. We will only find out what it is on Budget day, but reports suggest Reeves will have to raise between £20bn and £30bn to get the economy back on track.
The options
Income tax rates
As mentioned, Reeves was widely expected to increase income tax. Doing so would raise a lot – a 1p rise across all three bands – to 21p in the pound for basic rate, 41p for higher rate, and 46p for additional rate – could bring in more than £10bn a year, while a 2p rise could raise around £20bn.
However, after a week or so of suggesting this would happen, Government sources have now ruled it out – yet another U-turn would be so farcical as to be almost unthinkable.
Likelihood (out of 5): 1
Freezing income tax and national insurance thresholds
While Reeves is unlikely to touch rates, she could extend the freeze on the thresholds at which different income tax and national insurance rates kick-in.
Freezing thresholds means that as people’s earnings increase over time – often roughly in line with inflation – they end up paying higher amounts of tax in a process known as ‘fiscal drag’.
Thresholds have been frozen at their current levels since 2023 or earlier and are currently due to be uprated in line with inflation from 2028.
Reeves could opt to extend this freeze for two more years, which would net her about £8bn per year.
While she opted against doing this in last year’s Budget, it is highly likely that she will resort to this tax hike this time around (Sir Keir Starmer pointedly declined to rule it out when pressed by Kemi Badenoch at Prime Minister’s Questions this afternoon).
Freezing thresholds is attractive for politicians because it raises decent sums and is often less noticeable to people than hiking rates, which is why it is often dubbed a “stealth tax”.
Likelihood: 5
Income tax via threshold changes
Another way the government could raise tax is through reducing income tax thresholds.
Currently, people pay 20 per cent income tax and 8 per cent national insurance on earnings between £12,570 and £50,270.
They then pay 40 per cent income tax and 2 per cent national insurance on earnings between £50,270 and £125,140, and 45 per cent income tax on earnings above this.
Reeves could lower thresholds. The amount this would raise would vary depending on where the thresholds were set, but it would likely raise more than the £8bn from freezing the thresholds.
However, Governments sources have briefed that it is not on the cards.
Likelihood: 2
Bank surcharge rate
Reeves is considering increasing the tax banks pay on their profits.
Restoring the tax to 8 per cent would raise £2bn a year, according to the Trade Union Congress, and substantially higher sums could be brought in with a larger surcharge.
However, experts have warned that the hike could end up hitting savers if banks make decisions to try to recoup some of their lost profits. It might also be difficult to square with the pro-growth, pro-investment message which Reeves has been trying to deliver to the City.
Likelihood: 3
Milkshake tax
At the moment, a Soft Drinks Industry Levy – or Sugar Tax – applies to soft drinks with added sugar. It means that producers pay at least 18p per litre on soft drinks containing 5g or more of sugar per 100ml.
Milk based drinks are currently exempt but reports suggest this could end at the Budget, and the 5g threshold could be cut to 4g.
The amount raised by the tax would likely be small, with some estimates suggesting it would be up to £100m per year. But it is probably seen by Reeves as politically easy low-hanging fruit.
Likelihood: 5
New EV tax
Electric vehicles (EV) drivers could face a new tax in the Budget.
The government is reportedly exploring a new charge per mile, to be introduced from 2028.
Exactly how much this would raise would depend on the level the charge was set at, with some reports suggesting a 3p per mile charge, costing the average EV driver an estimated £250 per year.
It is generally accepted in Westminster that with more people going electric but with EVs currently exempt from fuel duty, the way we tax driving is unsustainable and will have to fundamentally change.
Likelihood: 4
NI increase via salary sacrifice cut
Reeves is reportedly planning to cap tax-free pension salary sacrifice at £2,000 annually – a measure that could raise up to £2bn a year.
Under a salary sacrifice arrangement, an employee agrees to give up part of their gross pay in return for a non-cash benefit such as pension contributions, childcare, or an electric car.
Employers benefit by saving on employer NI contributions, while employees pay less income tax and NI on their reduced salary.
Targeting salary sacrifice could be framed as a way of targeting tax increases towards higher earners (who are likely to save more).
Likelihood: 4
NI on landlord’s rental income
The Treasury is reportedly examining proposals to apply NI to rental income in the hope of raising £2bn.
Currently, income from property, pensions and savings is generally exempt from NI contributions.
This tax hike would fit with Labour’s pledge not to raise taxes on “working people”, but when the private rented sector is already digesting the Renters’ Right Act, the Chancellor may fear that it will cause landlords to pull their properties from the market, pushing up the cost of housing.
Likelihood: 3
Mansion tax
Reeves is considering introducing a new “mansion tax” on high-value properties. The i Paper revealed that the Chancellor had hinted at the change while hosting drinks for Labour MPs in No 11.
Under the proposals, any property worth more than £2m would have to pay an additional 1 per cent tax above that amount.
That would mean a property worth £3m would face an annual charge of £10,000, or £20,000 if the property was worth £4m.
The measure could reportedly raise between £2bn and £3bn, and would also apply at higher rates to second homes and the most expensive properties.
Likelihood: 4
Wealth tax
There are various ways that the Chancellor could introduce a wealth tax which would target a small group of the wealthiest individuals.
It could be complicated to introduce especially when deciding which assets to include under the tax and whether it is fair, for example, if it applies to people who have inherited or earned wealth.
How much the tax would raise would depend on how it is implemented.
Likelihood: 2
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