Ben Handley
Private Clients and OMB, Tax Partner
Since the 2024 Budget, spending cuts, tax receipts and economic growth have not materialised as the Chancellor had hoped, and it now seems highly likely that to meet her ‘non-negotiable’ fiscal rules, she will need to raise taxes. Some have argued that the current economic position is a problem of the government’s own making due to the impact of NIC and National Minimum Wage rises in April, but it is highly likely that the trade turmoil triggered by US tariff policy has also had an impact on UK growth.
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Jon Hickman - Corporate Tax Partner & BDO Budget lead
The Government’s fiscal rules apply over the ‘economic cycle’ – broadly the next five years. Balancing the books over the cycle doesn’t necessarily require immediate tax rises or spending cuts.
However, most economists are expecting tax rises in November to fill an expected Budget shortfall (of varying sizes). Below we consider some possible tax raising measures and give a ‘likelihood’ rating for each.
The current freeze on income tax thresholds and personal tax allowances is gradually dragging many individuals into paying tax for the first time and pushing higher earners across the higher and additional rate thresholds as their incomes increase over time. Read about your options if you are close to a threshold in our Tax Planning Guide.
Similarly, the freeze in the IHT nil rate bands continues to increase the IHT take as property values increase.
The current freeze for income tax thresholds is in place until 2027/28, but extending it to the end of the economic cycle (i.e. to 2030), could raise billions in revenue without technically “increasing income tax rates” – and it doesn’t feel like a tax rise for most taxpayers.
Likelihood - High
Although there has been much talk around the Labour government creating a wealth tax to collect additional revenue, struggles in applying similar taxes in other EU states, the associated ‘flight risk’ of wealthy individuals and the complexities of implementing it successfully in the UK make the idea unattractive. A wealth tax would be hard to characterise as a ‘pro-growth’ policy, and the political dangers for the government make this option unlikely.
Likelihood - Low
The Chancellor may look at indirect taxes on wealth. Taxing items that wealthy people own and use seems significantly easier to implement. New higher bands of Council tax and/or a house revaluation exercise and further moves on second homes could raise revenue in a targeted way, with the added political benefit that this would be carried out by local authorities and not central Government .
There have also been rumours of HM Treasury considering changes to the capital gains tax (CGT) rules for private residences. Currently, the exemption for gains on the sale of your home is not limited and can exempt all gains – although there are rules to be met to qualify. By removing the exemption where the value of the home exceeds a fixed threshold (figures between £500,000 and £1.5m are said to be under consideration), the Chancellor could significantly increase the tax collected from high-value property sales.
Another rumour suggests the Government is also considering creating a new tax on the sale of high-value homes (valued at £500,000 or more). A specific ‘Mansion tax’ would be easier to implement than a general wealth tax, although it may simply operate as a replacement for Stamp Duty Land Tax (widely seen as a block in the housing market).
Likelihood - High
It is understood that the Government is considering bringing unearned rental income of private landlords (individuals and partnerships) within the scope of National Insurance Contributions (NIC) in future. At present, NIC is charged at 8% on annual earnings between £12,570 and £50,270 plus 2% on earnings above £50,270. It is not clear how the rules would work for individuals with both earnings from employment/self-employment and rental income, but it seems reasonable to assume that they would be aggregated for purposes of the NIC thresholds. However, it is not clear whether a charge could apply if the letting business was held within a corporate structure (e.g. with a sole shareholder or ‘close company’), if the current ‘rent-a-room’ exemption for income tax would also exempt income from lodgers from NIC or whether rental income liable to NIC would qualify as ‘pensionable earnings’ for pension contribution purposes.
Despite these issues, landlords will need to declare rental income on quarterly Making Tax Digital for income tax returns (being phased in from 2026/27), so it would be relatively straightforward for HMRC to collect NIC on rental income.
Likelihood – Medium
Similarly, taxing specific luxury assets at a higher rate of VAT would be an effective way to target wealthy individuals to raise extra revenue. The Government is no longer restricted by EU rules when it comes to VAT (and some countries already have ‘luxury’ goods VAT rates anyway) so this might be another useful proxy for a wealth tax.
How ‘luxury goods and services’ are defined would be challenging - but perhaps this could target, for example, expensive cars, aircraft, yachts/motor boats, expensive motorbikes/bikes, motor homes, private clubs / sports club memberships or high value art / chattels.
Likelihood - Low
Comments by the Prime Minister about "fixing the country" for those who work hard but lack savings, and from the Chancellor about boosting investment in equities, have led to speculation over changes to the tax rules on dividends and cash ISAs.
Although the Chancellor seems to have ruled out a reduction in the annual cash ISA limit from its current £20,000 for the time being, it should be remembered that for many years the cash ISA limit was half the current annual limit – in order to encourage equity investment. An interim alternative might be to create a new allowance specifically for small company investment.
Similarly, it might be cast as an act of ‘simplification’ for dividends to be taxed at normal income tax rates, although the current £500 tax free allowance for dividends is likely to continue as the current practicalities of taxing smaller amounts would not be cost-effective for HMRC.
Likelihood - Medium
With the annual cost of providing tax relief on pension contributions estimated at £45-£50bn it is easy to see why there is always speculation about reducing relief at each Budget. However, this has proved a risky and difficult nut to crack for successive Chancellors.
In the 2024 Budget, the Chancellor announced that residual pensions funds (and lump sum death benefits) would be liable to IHT on the death of the pensioner after 6 April 2027. This is predicted to collect £1.46bn a year by 2029/30. But this is probably only the start.
Reducing income tax relief (currently given at the individual’s highest marginal rate) is a complex option because of the interaction with the PAYE system and the way that salary sacrifice schemes work. However, recent research published by HMRC suggests that it is also potentially looking at limiting such schemes in future.
Yet any reduction in income tax relief might simply deter individuals from saving for retirement and the government has recently acknowledged that most people do not save enough. So how do you collect more tax easily without discouraging pension savings?
One answer might be a simple levy on pension fund values – a small percentage added to the annual charges that pension fund managers already make. A 0.25% fund levy would hardly be noticed by most pension savers and would be minimal compared to the tax relief they already get and tax free growth in their pension funds, while still collecting billions for the government. It could easily be collected by pension fund managers with no involvement of the taxpayer and minimal support from HMRC. And it might be possible to target the levy at those with higher pension values (combined for all their pensions).
Likelihood - High
If salary sacrifice for pension contributions is targeted, it would be easy to envisage that blocking similar tax/NIC-efficient arrangements for the provision of electric vehicles (EVs) to employees could also be seen as a revenue raiser. Read about how EV salary sacrifice arrangements work now.
Given that the government recently announced a surprise clampdown on Employee Car Ownership Schemes that work around the benefit in kind rules for cars, it may be that salary sacrifice schemes for EVs will also be targeted in future.
Likelihood - Medium
The Labour manifesto committed not to increase NIC rates for individuals, but the recent increase for employers shows National Insurance Contributions remain an attractive source of revenue for the government.
Currently, individuals that carry on working past state retirement age pay no NIC (even though their employers do). This may offer scope for the government to introduce a new ‘older worker’ rate of NIC for such workers earning more than the ‘upper earnings’ limit (currently £50,270).
Likelihood - Low
Established HMRC behavioural research shows that a steep increase in CGT rates effectively increases tax revenue in the year before introduction, because people sell early to secure the current rate of tax. However, after introduction, the new rate reduces revenue as individuals tend to simply hold on to appreciating assets until there is a future change of policy.
A small increase in CGT rates has the same bring-forward effect, but without deterring sales activity unduly once the slightly higher rate is in place. Therefore, successive small increases in CGT rates should allow the government to collect significantly more CGT in the long run.
Likelihood - Medium
Frequent press stories about ‘non-doms’ and millionaires leaving the UK since the abolition of non-domicile status from 6 April 2025 have cast doubt on whether these reforms will collect the additional revenue that the government predicted. In our experience, IHT on worldwide assets is often the key factor in stay/leave decisions.
Given that the liability to IHT on worldwide assets now depends on a 10 year rule (ten years of tax residence in the UK), the government may decide to soften the implementation of this rule. For example, if the 10 year residence period started from 6 April 2025 and not the individual’s first year of UK residence (if earlier), this may help to protect tax revenue for a longer transitional period if more foreign nationals decide to stay in the UK (and pay lifetime taxes here) – at least until 2035.
Likelihood - Low
Press reports indicate that the government is considering changes to the current IHT gifts reliefs to reduce the opportunity for individuals to make tax-free lifetime gifts and thereby reduce the value of their estate and the IHT payable on their death. For an overview of the current options see our Tax Planning Guide.
The fixed level gift reliefs from IHT have not been increased for many years. Therefore, the government could take the opportunity for an update/overhaul of the current reliefs (perhaps consolidating them into one annual exemption) to also remove some of the more valuable reliefs.
At present, under the 7-year rule, a gift of any value can be free of IHT provided the individual survives for at least 7 years from the date of the gift. A taper applies to reduce the IHT due if the individual dies between 3 and 7 years from the date of the gift.
Gifts that individuals make out of their surplus income are also generally exempt as they are not ‘capital’ in nature and are deemed not to fall within the IHT net.
Either, or both, of these rules could be adapted or simply abolished - although this would likely only affect gifts made from Budget day onwards as records of past gifts would likely be patchy at best (HMRC does not require notification of gifts made in tax returns) and taxing past gifts would be retrospective taxation.
Changes to the gift reliefs and rules would not raise vast amounts in themselves, but in combination with the changes to IHT business and agricultural reliefs from April 2026, the cumulative effect could produce a significant increase in future IHT revenues over time.
Such changes would not affect the majority of taxpayers, nor breach any manifesto commitments - but IHT policy has become a political football in recent years due to constant press coverage, so reforms could be risky for the Government.
Likelihood - Medium
In March 2022, fuel duty rates were cut by 5p per litre and successive Chancellors have maintained this ‘reduction’ ever since: fuel duty rates last went up in 2011. Of course, at every Budget since then the Chancellor has announced that they will freeze fuel duty and has had to address the cost of doing so.
If fuel prices remain at current levels (close to prices in 2012 according to the RAC) and CPI inflation reduces before the Budget, it seems quite possible that the Chancellor might implement a small fuel duty increase.
Likelihood - Low
As the government is in the process of reforming the remote gambling levy, it seems quite possible that increasing the tax rates on gambling companies will prove attractive.
Similarly, if inflation is falling at the time of the Budget, taxes ‘for our own good’ on sugar, tobacco, and alcohol may well be increased - with some specific exceptions to support pubs and restaurants.
Likelihood - High
The bank surcharge is currently 3% on top of the main corporation tax rate of 25%. It would be a relatively simple measure to increase this surcharge, and if the Chancellor sees a pick-up in economic growth by the time of the Budget, it may be that an increase in the surcharge will prove attractive.
Alternatively, there may be a technical change to the relationship between banks and the Bank of England. At present, interest on funds held by commercial banks at the Bank of England is not liable to tax. Making these funds taxable could yield up to £3.3bn in revenue according to some estimates, without have an immediate impact on other taxpayers.
Likelihood - Medium
The pace of reform to business rates has been very slow, but changes this year will see businesses that use large/high value premises pay higher rates, with smaller high street premises retaining some business rates discounts.
It seems likely that further changes to increase business rates for warehouses used by online businesses and a gradual reduction in discounts for smaller businesses will continue in 2026 and beyond, as the government looks to phase down support for the high street retail and hospitality businesses.
Likelihood - Medium
Low value consignments of goods brought into the UK (below the £135 de minimis level) currently benefit from simplified customs reporting and are duty free. The US has recently suspended its own de minimis import exemption and the EU is also considering a similar move. The Government is already reviewing the UK limit, so it would be little surprise if this review is brought forward, and changes are implemented to support the UK based retailers competing with retailers based in China and other low-tax jurisdictions. Whether this would simply be a reduction in the value to a nominal level, or by abolishing this import relief altogether remains to be seen.
Likelihood - High
Requiring businesses to issue electronic VAT invoices to customers and automatically copy in tax authorities at the time of issue is seen as a way to both improve the accuracy of VAT records and reduce the risk of VAT loss through fraud and error. While EU member states are to formally adopt e-Invoicing as part of the VIDA projects, HMRC has also begun consulting on ways to increase the use of e-invoicing.
Likelihood - Medium
