Sir Keir Starmer has suggested that Rachel Reeves may consider tax increases or public spending cuts to avoid breaching her borrowing rules.
The Prime Minister, while not ruling out measures to reduce Government borrowing in next month’s Spring Statement, has firmly stated that there will be no repeat of the significant tax hikes seen in the last Budget.
On March 26, the Office for Budget Responsibility (OBR) will release an update on the public finances. Chancellor Rachel Reeves has pledged that her Spring Statement – also to be announced on the same day – will not introduce drastic changes to tax or spending policies.
However, with her borrowing rules deemed “ironclad,” any risk of breaching them could require adjustments to taxes or spending.
With weaker economic growth and higher inflation increasing borrowing, reports suggest the OBR’s headroom has been wiped out, leaving Reeves facing a potential shortfall that could require fiscal adjustments.
Income tax threshold freeze extension
Although Labour pledged not to raise taxes on working people, it’s predicted that Ms Reeves may extend the freeze on income tax thresholds.
Currently set to last until 2028, the freeze has already led to higher tax bills for many as inflation and wage growth push them into higher tax brackets, a phenomenon known as fiscal drag. The latest OBR estimate is that the current freeze will raise over £38billion a year in 2029/30.
Economists predict the freeze could be extended until 2030, generating even more revenue, but it may face criticism from those already feeling the financial strain.
Tax-free ISA changes
One of the areas most discussed for potential reform is individual savings accounts (ISAs). The Resolution Foundation think tank previously proposed introducing a cap on the amount that can be held in tax-free ISAs, with some calling for a limit of £100,000.
Former Resolution Foundation director Torsten Bell has recently joined Ms Reeves’ team on the Treasury. Additionally, there are rumours that the Government could reduce the annual cash ISA limit from £20,000 to a smaller amount, like £4,000 or £5,000, impacting high-saving individuals.
Another possibility is scaling back or scrapping the Lifetime ISA, a tax-free savings account designed to help young people save for a home or retirement. The scheme has faced growing criticism, particularly as soaring house prices and strict property price thresholds have made it harder for many to use the account effectively, especially in expensive cities. Additionally, penalties for early withdrawals further limit its flexibility.
However, the Treasury could overhaul the system instead to benefit savers. A review is currently underway, with experts calling for an end to the early withdrawal penalty and an increase in the property purchase price limit.
Tim Stovold, partner and head of tax at Moore Kingston Smith, pointed out that one of the key questions in the consultation could be whether to scrap the Lifetime ISA altogether.
He told the Telegraph: “Whenever a consultation asks this, it’s softening us up for it to be scrapped. Everyone will say it’s an unnecessary complexity in the tax system. Lisas are at risk, and removing them could raise a few pounds for the Treasury.”
National Insurance Contributions (NICs) extension
Ms Reeves might also expand the scope of National Insurance Contributions (NICs) to include employee benefits-in-kind, such as company cars, discounted goods, or free services.
Currently, NICs are only levied on cash earnings, but this change would broaden the taxable scope to include non-cash benefits, thereby increasing Government revenue.
Potential VAT expansion
Another potential tax change involves expanding VAT to cover university education or private healthcare. As these services are often privately run, VAT could be applied similarly to how it was recently introduced for private schools.
Changes to pension tax-free lump sum or relief
A controversial change might involve reducing the 25% tax-free lump sum that can be taken from pensions upon retirement.
Currently, people can access 25% of their pension pot, up to a limit of £268,275, tax-free from age 55. During last year’s Autumn Budget, there was speculation that this limit could be lowered to £100,000, which would likely be contentious as many rely on this tax break to incentivise saving for retirement.
Additionally, the issue of pension tax relief continues to spark debate. The Treasury spends around £50billion annually on pension tax relief, which disproportionately benefits higher earners who receive 40% or 45% relief, compared to 20% for basic-rate taxpayers.
Ms Reeves could decide to equalise relief for all, potentially saving the Treasury billions. She wrote in an article in 2016 that a flat rate of pension tax relief of 33% would be “a welcome boost for basic-rate taxpayers and a cut in the savings subsidy for higher earners.”
Express Finance Editor Harvey Jones speculates that another potential change could be reducing the pension annual allowance from £60,000 to £40,000 – or lower.
Capital Gains Tax increase
After missing an opportunity to raise capital gains tax in the autumn Budget, Ms Reeves may opt to increase Capital Gains Tax (CGT) in her Spring Statement.
During the Autumn Budget, Ms Reeves increased the main rates of Capital Gains Tax (CGT) from 10% and 20% to 18% and 24% respectively.
Jason Hollands, managing director of Evelyn Partners, a wealth adviser, suggested the rates could be “nudged up” a bit more. He said: “It can’t be ruled out. There was even talk of aligning with income tax, but that would be very damaging for entrepreneurs. Could they come back and add a little bit more? It’s possible.”
Inheritance tax gifting rule
The inheritance tax seven-year gifting rule could also be at risk. Tax experts have reported an increase in clients gifting wealth to family members, fearing that the rule may be extended to 10 years or scrapped entirely in a bid to raise revenue.
The seven-year rule currently allows individuals to pass down money or assets tax-free or at a reduced rate if given up to seven years before death.
However, concerns are growing that this rule could be targeted after the Chancellor included unused pension pots in the inheritance tax net from April 2027.
