Thoughts ahead of the Budget – which taxes might rise?

With spending cuts off the table, an economy growing only marginally and a fiscal gap estimated at as much as £35bn, tax rises are inevitable – by Rob Morgan

In time honoured fashion it’s time to dust off the Budget crystal ball. While the outlook is murky in terms of the details, it’s clearly going to be a significant event in terms of the impact on personal finances.

With the government seemingly unable to make any meaningful spending cuts, an economy growing only marginally, and a fiscal gap estimated at as much as £35bn, the  Chancellor stands in the middle of a labyrinthine trilemma. The only immediate route out of the maze involves tax rises – even though this may backfire if they further hamper growth.

So, with no obligation to cross my palm with silver, and the substantial caveat that I know no more than anyone else, let’s consider some of the rumours that have been circulating.

Income tax and national insurance

In its manifesto, labor pledged not to raise Income tax and national insurance (NI) on individuals, nor VAT. But this commitment now seems well past its shelf life. Only the major taxes have the revenue-raising potential to fill a large portion of the hole in the government’s finances.

With unwanted inflationary consequences of raising VAT and corporation tax a likely no-go area with many businesses already struggling, it leaves income tax and national insurance firmly in the cross hairs for a broad increase.

One idea floated is to raise the basic rate of income tax, say by 2%, but reduce NI by the same amount. This would have no impact on employed or self-employed people as one balances out the other, but it would significantly impact those receiving pension or property income. This also fits the narrative of protecting ‘working people’ so this, or something like it, could easily happen – if not a broader income tax rise affecting all taxpayers more equally.

You can also pretty much take it as read that income tax bands will be frozen further into the future – potentially to 2030. As things stand they are set to rise with inflation again from 2028 – having been frozen since 2021/22 tax year – which means a continuation of the tax creep known as ‘fiscal drag’.

Property

If there’s one area that seems ripe for reform its property taxes. There’s a good case for getting rid of stamp duty on residential property altogether as it reduces transactions and hampers social mobility. But that’s probably not going to happen anytime soon thanks to it being a nice little earner for HMRC.

Meanwhile, reforming council tax bands has been mooted as a way to impose a ‘mansion tax’ on high value properties through an existing system. This muddies the waters of national and local taxation, so it’s messy, but it does seem possible for a Chancellor forced to think outside the box to implement some kind of workable ‘wealth tax’.

Some of the other speculations around property such as a levy on the sale of high value properties, or even CGT on larger first homes, seem illogical. Such moves would increase the incentive for homeowners to stay put and further gum up the property market making it harder, rather than easier, for people to move home.

Inheritance tax

Having rightly adopted the brace position last time around, those concerned with estate planning will be surveying this year’s Budget with similar caution. The inclusion of pension pots in estates from April 2027 and the limitation of agricultural and business reliefs from next year has already had a dramatic effect on intergenerational planning.

With renewed focus on gifting through annual allowances, potentially exempt transfers (PETs) and the ‘surplus income’ rule, there is some unease these methods may come under scrutiny. However, there is reason for the Chancellor to tolerate gifting rather than tighten up on it, especially from pensions where withdraws face marginal rates of income tax – therefore swelling exchequer coffers. The beneficiaries of gifts are also more likely to spend the money rather than keep it tied up in assets, which possibly translates to a small economic boost.

The Chancellor may therefore consider it pretty much job done on IHT and move onto areas that more meaningfully move the fiscal dial, though she may be considering some kind of new overall gifting cap. Presently, an unlimited amount can be passed on tax free provided the donor survives seven years.

Capital Gains Tax (CGT)

To no-one’s surprise the Chancellor increased CGT in last year’s Budget, upping the standard rates to align them with residential property assets at 18% and 24% for basic and higher rate respectively. Meanwhile, business asset disposal relief, whereby eligible assets attract a lower rate, was reined in with the rate increasing from 10% to 14% for 2025/26 tax year and 18% for 2026/27.

Is a second bite of the CGT cherry likely? We may already have reached the point at which raising it further reduces rather than increases the tax take – the peak of the Laffer curve in economists’ parlance. Many disposals that attract CGT are discretionary and can be put off, so behavioral change is an important factor. What’s more, upping CGT would do precious little to raise revenue anyway as it only accounts for about 1.5% of total tax take.

However, this may not prevent the Chancellor having another go, especially if income tax is rising simultaneously. Maybe she could sweeten the deal with some kind of new allowance or relief for investing in ‘UK assets’ to help revive capital markets suffering from a dearth of investor interest?

ISAs

Earlier this year the government was rumoured to be considering a cut in the amount savers can add to Cash ISAs. Currently you can contribute up to £20,000 a year across both Cash and Stocks and Shares ISA in any proportion. Policymakers were looking to limit the cash part to encourage more investing, particularly in the UK stock market. There are now rumours that these plans are being dusted off for a Budget announcement, perhaps halving the amount that could be allocated to Cash ISAs to £10,000.

Paring back the extent to which people can contribute Cash ISAs looks possible and a two-tier system for cash and shares is not without precedent. Today you can split the £20,000 overall annual ISA allowance in whichever proportion you like. But in the early days of ISAs an individual had the choice of a ‘Mini’ Cash ISA and a ‘Mini’ Stocks & Shares ISA, with limits of £3,000 each, or they could contribute up to £7,000 in a ‘Maxi’ Stocks & Shares ISA. The tax-free environment was therefore larger for those wishing to allocate to shares.

Although these rules were a bit complex, they did achieve the policy goal of incentivising long-term investing on top of saving, while still offering savers a tax-free environment. It appears this is the sort of balance the Chancellor is looking to strike going forward.

Rob Morgan is Chief Investment Analyst at Charles Stanley

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