Budget Rumours: Chancellor casting the net widely for tax rises

CIOT and our Low Incomes Tax Reform Group will be reacting to the Budget measures through the Budget day. Stay across the announcements and our responses via our Budget hub page.

Current top lines

• Tax raising Budget widely expected
• Income tax thresholds likely to remain frozen, but no increase in rates
• Pension contribution salary sacrifice expected to be capped
• ‘Mansion tax’ on most valuable homes anticipated
• Business rates and VAT ‘de minimis’ changes also expected

NB. Substantial updates to this document since Friday 21 November are italicised. Last update: 11am, 25 November.

Context / public finances

The latest Office for Budget Responsibility forecasts reportedly show a smaller deterioration in the public finances than previously expected, according to the Financial Times, the BBC and others, meaning a smaller than previously expected (though still large) gap to fill in the government’s finances at the Budget.

Lower productivity expectations had previously led to an expectation that there would be a deterioration of around £30 billion in the government’s finances compared to the time of the spring forecast. However, the BBC says, “more recent assessments from the OBR appear to have increased the projected strength of wages and tax receipts in the coming years and offset several billion pounds of that gap, taking it closer to £20bn.”

In addition to this there is the question of whether the Chancellor will seek to increase her amount of ‘headroom’ – that is, her wiggle room against breaking her fiscal rules (primarily the rule that UK net debt as a share of GDP must be forecast to fall within five years). According to the FT, Downing Street officials have told them the Chancellor wants to add at least £5bn to her previous headroom of £9.9bn.

Income tax and national insurance

The updated forecasts appear to have prompted the abandonment of plans for an increase in income tax rates (though some economists are sceptical the developments are unexpected or significant enough to justify this). The FT (14 Nov) reported that the Prime Minister and Chancellor have “ripped up” plans to raise the basic and higher income tax rates at the Budget. According to the FT the decision was communicated to the Office for Budget Responsibility on Wednesday 12 November in a submission of “major measures” set to be announced in the Budget.  

The FT suggests that Rachel Reeves is now exploring a “smorgasbord” of measures to fill the fiscal hole. The paper’s initial report suggested this included cutting the thresholds at which people pay different rates of income tax. However a later story quoted sources as saying that Reeves is not planning to lower personal tax thresholds. The Chancellor is still expected to extend the freeze on personal tax thresholds – including income tax and national insurance – for another two years until 2030. This is expected to raise £8bn to £10bn a year. The IFS says it would lead to the number of higher-rate income tax payers in the UK exceeding 10 million for the first time. The Prime Minister refused to rule out this change when challenged in Parliament on 19 November and again when challenged on Sky News on 21 November.

According to the Telegraph the Chancellor is “poised to increase” the tax rate on earnings from shares. The paper says it understands Reeves will put up the rate of dividend tax as part of a drive to tax income from wealth more equally to earnings made from work. While noting suggestions that the rate be doubled the paper says it understands Reeves will not go that far and suggests she could opt for “a middle ground”, raising the basic rate by four points to 12.75 per cent, bringing in around £1.5bn.

The Chancellor is also said to be looking to cut again the tax-free dividend allowance, even though this has already been cut to £500. The Telegraph notes that former deputy prime minister Angela Rayner suggested this in her leaked tax memo. This would raise around £325mn.

The personal savings allowance will remain frozen for another year, again according to the Telegraph (16 Nov). This allowance allows basic rate taxpayers to earn up to £1,000 in savings interest tax-free. This falls to £500 for higher-rate taxpayers, while additional-rate taxpayers get no allowance at all.

Savings income looks set to come under further pressure with the Chancellor cutting the annual Cash ISA allowance. The FT reported (6 Nov) that the Treasury has privately floated a level of £12,000 a year, down from the current £20,000 but higher than Reeves’ initial £10,000 proposal. This is part of efforts to encourage people to invest more in stocks and shares. The same paper (24 Nov) firmed up its speculation at the start of Budget week, reporting that 'people close to preparations for Wednesday’s Budget' have told it that Reeves will cut the annual cash Isa limit to £12,000. 

Reports over the summer that the Treasury is considering applying national insurance to landlords' rental income continue to be given credence and have not been debunked by government sources.

However proposals to put national insurance or an NI-like levy on the income of members of limited liability partnerships do appear to have been dropped. The Times (14 Nov) reported that the Chancellor has abandoned the plans after Treasury modelling indicated that partnerships would bring forward profits to avoid the new charge before its introduction. Reeves was reportedly considering the introduction of a charge of about 7%.

Pensions and tax

Recent media reports, including in the Times (8 Nov), have sparked speculation that the Chancellor may target salary sacrifice pension schemes in the Budget. There is currently no limit on how much money an employee can put into their salary sacrifice pension scheme before they are taxed. But Reeves is reportedly considering a new rule that would cap tax-free contributions at £2,000 annually. Any amount above this threshold would be subject to national insurance payments— 8% for salaries under £50,270 and 2% for income above that. Employers would also see changes, as their contributions currently avoid a 15% NI charge.

Meanwhile, officials have confirmed (11 Nov) that the Chancellor will not reduce the tax-free pension lump sum limit in the Budget. Currently, individuals can take up to 25% of their pension tax-free, capped at £268,275 once they reach 55. This confirmation came after reports of ‘panicked withdrawals’ from retirement funds amidst fears of potential changes.

Property taxes and capital gains tax

The Chancellor is widely reported to be planning a new levy of some sort on high value properties (dubbed a ‘mansion tax’). 'The i' paper (19 Nov) reported that the Chancellor told a group of Labour MPs at a Monday (17 Nov) drinks reception that she was working up plans to target the highest value homes in the country. Further details appeared in The Times (24 Nov) which suggested the threshold will be £2 million rather than the originally rumoured £1.5 million. The paper states that Rachel Reeves plans to raise £400-£450 million from the levy, and that it will be collected through council tax bills. The charge is expected to be levied on the 100,000+ affected properties using an escalator with different bands depending on the value of the property.

According to ‘The I’, properties will be taxed at 1% of the value above the threshold each year. (The Times report does not indicate a rate.) Both 'The i' and The Times report that owners of expensive homes on modest incomes are likely to get the chance to defer the tax until the property is sold or they die. It is unclear how this would impact those who inherit the property. 'The i' thinks it likely that the tax would be taken from the estate before it is valued for inheritance tax, potentially lowering the resulting bill.

Rumours also persist that sellers of the most valuable residential properties could have to pay capital gains tax with private residence relief being curtailed. In August The Times suggested this might happen for properties worth more than £1.5 million.

However the Chancellor is reported to have abandoned plans for an "exit tax" on wealthy individuals due to concerns it could lead to a mass departure of millionaires from the UK. The proposed levy aimed to tax entrepreneurs selling assets before leaving the country. A source told The Telegraph the exit tax could potentially set a warning to others that the UK is "less welcoming" to entrepreneurs. They added: "Introducing an exit charge would risk signalling that the UK is less welcoming to entrepreneurs and global talent, and that’s not something the Chancellor wants to do."

Could further increases in CGT rates be on their way? While this is much speculated about there have been no authoritative looking rumours that it is on the cards. There were of course increases in CGT rates in last year’s Budget.

Inheritance tax

The rules on lifetime gifting are reportedly under scrutiny, with two main changes rumoured: a lifetime cap on tax-free gifts (potentially as low as £100,000 or even £50,000), and changes to the seven-year rule. The Telegraph has suggested that the residential nil rate band might be removed. However there has been no reporting that changes will be made as opposed to just being under consideration.

Another possibility is changes to the proposals announced in last year’s Budget to restrict business and agricultural property reliefs and to bring unused pension pots within the scope of IHT. Again there is nothing authoritative, but it would be surprising if there is no mitigation of the proposals on APR and BPR in particular following strong campaigns which have cross-party support in Parliament. Possibilities with widespread support include changes to transitional arrangements for older farmers in particular and an increase in the level of the allowance. More radically some variation on CenTax’s proposal for a “minimum share rule” (at least 60% of the deceased’s estate be made up of qualifying farmland or business assets to claim full relief, with farms retaining full relief up to £5 million per person) remains a possibility. 

Business rates

We know there will be something on business rates at the Budget after the Chancellor told MPs on 4 November: “We will be setting out more information on our reformed business rate system to help our high streets and help our small businesses on 26 November”.

The interim report on business rates reform published in September commits to exploring a move from a "slab" to a "slice" approach (moving from a single multiplier applied to the full rateable value to increasing rates for successive bands). According to the FT (2 Oct) the Chancellor is set to backtrack from plans to put large retailers in the top business rates band following complaints by retailers who warn it would push up inflation on food.

Other business taxes

The Times (19 Nov) says the Chancellor “is considering steps to shield small businesses and the self-employed from the sharpest tax rises in her Budget”. Citing ‘insiders’ the paper says measures are expected on business rates (see above) and potentially the NICs employment allowance. It notes that, on the latter, the Federation for Small Businesses is lobbying for it to be uprated in line with the national living wage.

We can expect the government’s proposals for the future of the energy profits levy to be published on Budget day. The Exchequer Secretary told MPs on 4 November that this would be the case.

Another measure widely expected is increased taxes on the gambling industry. The Telegraph (2 Nov) has reported that these are expected to raise about £1 billion but they will exclude horse racing.

Speculation has ebbed and flowed over whether we will see an increase to the corporation tax surcharge for banks. This currently stands at 3% above the main CT rate having dropped from 8% above in 2023 when the overall rate was increased to 25%. The Telegraph (18 Nov) stated that the Chancellor had softened her previous opposition (reported in the FT on 5 Nov) to a tax rise for banks, noting that many banks have enjoyed a boost to profits thanks to interest rate cuts. But the paper said the decision remained in the balance with no decision having been taken either way at that point. At the start of Budget week the FT (24 Nov) reported that lobbying against increased taxes on banks "appears to have been successful" and that Rachel Reeves was preparing "to spare the sector from a tax raid". 

In better news for financial services, the Treasury is reportedly (FT, 1 Oct) set to give a stamp duty holiday to new London stock exchange listings in the wake of fears about the diminishing competitiveness of Britain’s public markets. Currently investors pay a 0.5% tax on buying the shares of newly-listed companies in the UK.

There have been suggestions the government may extend the scope of the UK’s 100% first year capital allowances to intangibles (ie the purchase of patents, licences and software).

According to Sky News (15 Oct), the Chancellor has also been considering plans drawn up by officials to lift the cap on Enterprise Management Incentives (EMIs) – the scheme which allows smaller companies to offer share options to employees with no income tax or NI liabilities. The EMI share options cap currently sits at £250,000 over a three-year period, and is applicable to businesses with assets of £30m or less, as well as fewer than 250 employees. Insiders quoted by Sky said that the Chancellor was considering plans to lift the EMI cap by "a multiple" of its current level.

VAT

The Treasury is expected to announce the ditching of the “de minimis” rule, which currently allows overseas retailers to send goods worth £135 or less directly to UK consumers without paying customs duties or VAT, but the change will be phased, with the rule not abolished until at least March 2029, according to The Times (22 Nov). The paper says Reeves has decided to phase out the exemption gradually "amid concerns that scrapping it straightaway could clog up borders and create chaos for brands and logistics providers". It states that the chancellor will launch a consultation on how to design and implement the new customs arrangements for low-value imports, with detailed proposals expected in the coming months.

It's understood that the government may step in to help lower energy costs, potentially by scrapping the existing 5% VAT on energy or cutting back on some of the regulatory charges included in energy bills.

It has been reported that the government is set to impose a flat 20% VAT fee on all private hire bookings, which would significantly increase costs for passengers using services like Uber and Bolt. The Times reported (20 Nov) that the Chancellor "is expected to push ahead with" these plans.

There were reports in August that Rachel Reeves was contemplating raising the VAT registration threshold from £90,000 to stimulate economic growth. But other reports around the same time suggested there was pressure from within government for the threshold to be reduced. Anything is possible but the likeliest outcome is probably no change.

Meanwhile on VAT administration, there is a strong chance we will get an update on the government’s e-invoicing proposals including their response to the consultation carried out earlier this year. 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. 

Other indirect taxes and levies

Drivers of electric vehicles (EVs) look likely to face a new pay-per-mile charge, according to a number of sources. The Telegraph (6 Nov) reported that there will be a consultation and that EV drivers could be charged 3p per mile from 2028, on top of other road taxes. Drivers of hybrid cars would also be charged, but at a lower rate. 

As well as confirming that a cut to VAT on energy bills is under consideration, Politico (19 Nov) says that Treasury officials are exploring ways to cut domestic energy costs by shifting some levies currently added to household bills into general taxation.

The Chancellor is expected (Evening Standard, 18 Nov) to give metro mayors (and wider local government?) in England the ability to introduce a visitor levy (often called a tourist tax). Visitors staying overnight in hotels and other paid for accommodation would be charged a small fee. Local authorities in Scotland and Wales already have the power to introduce a levy of this kind. The Times (16 Nov) reported that the new power will be introduced using amendments to the English Devolution and Community Empowerment Bill, which is currently making its way through parliament.

The Chancellor is also contemplating an increase in alcohol duties, reports City AM. Any change could potentially align with the RPI inflation rate of 4.5%. But industry representatives are lobbying against the possible rise, arguing it threatens jobs and businesses.

The Soft Drinks Industry Levy known colloquially as the 'sugar tax') looks set to be expanded to include milk-based drinks, with the Telegraph reporting (16 Nov) that the Chancellor plans to lower the threshold of sugar allowed tax-free in drinks to 4g per 100ml. The Times (25 Nov) reportedly similarly, saying the expansion of the levy would catch "milkshakes and lattes". (NB. The tax applies only to packaged drinks. Those that are made in cafés and restaurants are exempt and are expected to remain so.) 

There have been predictions that changes will be made to landfill tax reform proposals, following strong criticism of the costs the proposals will add to new building.

Tax administration and compliance

We can expect to hear updates on the government’s tax compliance work in the Budget.

One particular measure that is expected to be announced in the Budget, according to the FT, is a ‘US-style incentive scheme’ for whistleblowers of large-scale tax fraud. The paper says HMRC is set to launch the reward scheme later this month and could pay as much as 30 per cent of any taxes collected as a result of tip-offs from informants.

Additionally the independent review of the loan charge and the government’s response to it are expected to be published on Budget day. This is according to a written parliamentary answer from the Exchequer Secretary on 20 October. The review, carried out by former CIOT President Ray McCann, is examining the barriers preventing those who are subject to the loan charge but have not already settled and paid their tax liabilities in full from reaching resolution with HMRC.

Budget speculation updates produced by the CIOT External Relations Team