There is not yet a date for this year’s Autumn Budget. But by convention it is normally a Wednesday, so October 29 and November 5 both look like good bets. For presentational reasons the Chancellor might want to give Bonfire Night a wide berth. The inevitability of Guy Fawkes-themed headlines about taxes “going up like a rocket” or a “bonfire of broken promises” will surely make nervous Treasury spin-doctors urge another day.
Whatever the final choice, there are three months still to go and the summer holiday season is well under way. But Rachel Reeves is certain to be spending much of her time on the sun lounger inking in the broad outline of what is likely to prove a very difficult Budget presentation to MPs and voters.
She is already horribly hemmed in by Labour’s manifesto pledge not to increase the rate of income tax, national insurance, corporation tax or VAT — the four biggest revenue raisers.
The Chancellor also told the CBI conference last year that, having unleashed £70 billion of extra public spending and £40 billion of tax hikes in the 2024 Budget, she would “not come back with more borrowing or more taxes”.
But, after a year of disappointing economic growth and bruising U-turns on welfare cuts, there is scarcely an economist in the City who does not believe she will be coming back for a second bite of the fiscal cherry.
Most suggest a further round of tax hikes of at least £15 billion and perhaps as much as £30 billion a year will be needed to keep within her fiscal rules and still leave a modicum of safety margin in case something nasty comes along. As it almost always does.
Reeves will no doubt argue that the Government’s new pledge to raise defence spending to three per cent of GDP in the next Parliament, and the geopolitical turmoil unleashed by Donald Trump’s “Liberation Day” tariffs, mean the goalposts have moved. What she may not mention is that Labour revolts on disability benefit and Winter Fuel Payment cuts are also very much in the frame for the deteriorating outlook for the public finances.
So her conundrum is this: how can she possibly load yet more taxes on heavily burdened families and businesses without further depressing the growth prospects for the British economy?
Individual taxpayers will be asked to bear the brunt — Londoners most of all
One thing we can probably be sure of. She is unlikely to go back to the business sector for more revenue, given the devastating economic and political fallout from the £25 billion-a-year increase in employer National Insurance contributions that came into force in April.
No, this time it will be individual taxpayers who will be asked to bear the brunt, and Londoners are likely to feel it the worst.
An easy hit — and one the Chancellor could argue is technically not a tax rise at all — is extending the freeze on income tax thresholds rather than raising them in line with inflation.
These are a hangover from the days when Rishi Sunak and Jeremy Hunt occupied Downing Street and were looking for clever ways to balance the books.
The freezes are scheduled to end in April 2028 but given the huge sums involved — they will have increased the annual tax take by nearly £40 billion a year by the end of the decade — it seems odds-on the horizon will be extended.
A pay rise in line with inflation will drag thousands of London middle earners into a tax band that was supposed to be paid only by bankers
This is a revenue-raising measure that is particularly focused on the capital. The threshold for the 40 per cent higher rate tax – originally designed with only the highest earners in mind — has stood at a relatively modest £50,270 since 2021. But in London the median full-time salary already stands at £47,455. That means a pay rise merely in line with inflation will drag thousands of London middle earners — teachers, nurses and PAs — into a tax band that was supposed to be paid only by company directors and City bankers.
Nevertheless, it feels nailed on. As Professor Joe Nellis, economic adviser at accountancy firm MHA, puts it: “I would be shocked if she didn’t do that.”
According to the Institute of Fiscal Studies, prolonging the freeze for a further two years could raise an extra £10 billion a year by 2030. For Reeves that is certainly useful money, although not enough to be fully comfortable.
So where will the extra money come from? There has been much noise on Labour backbenches about a wealth tax, a hare set running by party grandee Lord Kinnock. But most academic studies show this is a complex and highly ineffective mechanism since many of those targeted by it can simply relocate elsewhere. The Government would also be unlikely to double down on the UK’s damaged image among the global elite following the scrapping of the non-dom regime.
Nonetheless, the rumours have not been definitively killed off by Downing Street. Some observers suggest the public are being softened up for some form of “wealth tax lite”. This could include reducing or scrapping the £500,000 inheritance tax-free allowance for passing on the family home to “direct descendants.”
It would be astonishing, too, if the Treasury number crunchers are not eyeing up the low-hanging fruit of pension tax relief, a giveaway now worth an astronomical £70 billion in gross terms.
Areas that Reeves might consider fair game include salary sacrifice, when staff forgo part of their pay packet in return for the same amount going into a workplace pension. It is a useful perk, particularly for employees caught in the “six-figure tax trap” which inflicts a punitive 60 per cent marginal tax rate on those earning just over £100,000.
All will be revealed in about 90 days, when Reeves faces the unenviable task of looking the country in the eye, confessing that the current level of taxation is not enough and say, in the words of Oliver Twist: “I want some more.”
