Chancellor Rachel Reeves is being urged to raise taxes as the UK’s financial “black hole” is now estimated to exceed £50 billion. The left-leaning National Institute of Economic and Social Research (NIESR) has warned that the Chancellor will need to increase taxes to cover this shortfall.
The shortfall comprises £41.2 billion in additional spending commitments, alongside £9.9 billion in “headroom” that Reeves wants to maintain in her fiscal plans. NIESR cautions that she faces a “trilemma”: either cut spending, increase taxes, or borrow more. NIESR warns, “The Government is not on track to meet its ‘stability rule,’ with our forecast suggesting a current deficit of £41.2 billion in the fiscal year 2029-30. Substantial adjustments in the Autumn Budget will be needed if the Chancellor is to remain compliant with her fiscal rules.”
The report also highlights the impact on the poorest 10% of UK households. “Living standards for the poorest 10% are falling. In 2024-25, they are expected to decline by 1.3% compared with 2023-24, and they are still approximately 10% lower than pre-Covid levels.” While living standards for middle- and high-income households are expected to grow modestly in 2025-26, the poorest households will likely face a decline, as higher-than-inflation increases in housing and food costs will outpace income growth.
Which Taxes Could Rise?
If Reeves does decide to raise taxes, the key question is which taxes could be affected. Labour has committed to not raising taxes on “working people,” though the definition of “working people” remains unclear. This commitment likely excludes increases in income tax, national insurance, and VAT, the three largest sources of government revenue. However, this limits the Chancellor’s options for raising money.
One possible move could be extending the freeze on income tax thresholds—a practice known as “fiscal drag.” This involves keeping the thresholds for higher and additional income tax rates (currently £50,270 and £125,140 respectively) at the same nominal level instead of adjusting them for inflation. This means that when individuals receive pay raises, they could find themselves entering higher tax bands more quickly and, therefore, paying more in taxes.
Reeves may also opt for more of what she’s already done—adjusting a range of smaller taxes to help make up the deficit. Changes to capital gains tax, inheritance tax, and other taxes are all possibilities.
What Can You Do?
For those worried about potential tax hikes, it’s important to remember that nothing is certain yet. We won’t know what, if any, tax increases will occur until the Treasury releases its plans and Reeves makes an official announcement.
In the meantime, it’s essential to continue with your long-term financial plans as they currently stand. Making drastic decisions based on speculation isn’t advisable.
Some changes, however, have already been confirmed and given ample notice. For example, pensions will be included in estate calculations for inheritance tax purposes starting in 2027.
For issues like this, it’s crucial to consult with a professional financial planner who can help guide you on the best course of action, offering peace of mind about how potential tax changes might impact your long-term financial strategy.