The question isn’t whether the Chancellor will raise taxes in her autumn Budget. She has no choice. How else can she cover the estimated £600billion of commitments announced in yesterday’s Spending Review?
The only real issue is where the money comes from – and who pays.
Robert Salter, director at tax advisory firm Blick Rothenberg, warned: “Given the size of the Government’s planned spending increases, significant tax rises are inevitable in the coming months.”
One pledge alone highlights the scale. “The increase in the defence budget of around £11billion a year is on its own equivalent to an increase of 1.5p on the basic rate of income tax,” Salter said.
But an income tax rise would break Labour’s manifesto – and trigger a backlash Reeves can ill afford. As would lifting VAT or national insurance, which she’s also ruled out.
Still, with experts warning she may need to raise between £24billion and £30billion, she’ll be back for more tax.
Shadow Chancellor Mel Stride warned of a “cruel summer of speculation” as taxpayers brace for the price of Labour’s spending spree.
It’s already begun.
Myron Jobson, senior personal finance analyst at Interactive Investor, said we now face “the most consequential Budget in a generation come autumn”.
Trapped by sluggish growth, rising public sector costs and strict fiscal rules, Reeves is running out of options. Her most obvious target is the income tax threshold freeze.
Already set to run until 2028, the freeze is dragging millions into higher tax bands as wages rise. Reeves could extend it to 2030. It was originally a Tory trap – and now she’ll blame them, even as she makes it her own.
Extending the freeze would raise £9billion a year, according to the Institute for Fiscal Studies.
James Smith, developed markets economist at ING, calls it the one “juicy apple left on the tree”. “It’s surprising the Chancellor hasn’t already done this.”.
But it still wouldn’t be enough. “It leaves another £10billion or so to find, which will be difficult without touching the major revenue raisers,” he added.
Sarah Coles, head of personal finance at Hargreaves Lansdown, agrees a freeze extension is likely, but warned it won’t fix the immediate problem. “This will raise money in future years, but won’t help balance the books today.”
She also highlighted three more areas ripe for attack.
Pensions look vulnerable. Salary sacrifice schemes, where workers give up part of their salary in return for pension contributions, could be curbed.
Reeves might even revive the pensions lifetime allowance, axed by the Tories, which hits savers with a brutal 55% charge on pots above a certain level. It’s a complex and deeply unpopular, but could be back.
Higher earners could see tax relief on pension contributions trimmed or capped. The 25% tax-free lump sum is also a tempting target.
Investments could be next. Coles warned Reeves might scrap the £500 dividend allowance or hike capital gains tax. Tory Chancellor Jeremy Hunt has already squeezed both – giving Reeves political cover.
But Coles cautioned: “It would be counter-intuitive to make dividend investing less rewarding given the government is keen to encourage investment in the UK.”
Inheritance tax is another hot prospect. Reeves has already moved to make unused pensions liable to IHT. Coles said she could go further by tightening the seven-year rule on lifetime gifts, dragging more money back into taxable estates.
Any one of these moves would cause uproar. Together, they still may not be enough. The Chancellor’s Spending Review is set to be very taxing for the rest of us.
