The Chancellor is discovering a brutal truth, that hiking taxes doesn’t always boost revenues. In fact, it can do the opposite.
The respected National Institute of Economic and Social Research (NIESR) forecasts Reeves for a total fiscal “black hole” of £51.1billion this Parliament. Plugging that would mean huge tax hikes, such as raising both the basic and higher rates of income tax by five percentage points, NIESR says.
Income tax is hard to avoid Reeves knows she can’t hike it without breaking Labour’s manifesto pledge. So instead she’s been fiddling around the edges, but these minor raids are going badly.
Take capital gains tax. After her CGT hike in October’s Budget, receipts have fallen, not risen. In the first six months of 2025, the Treasury pulled in £11.8billion, down from £13.5billion a year earlier. That’s a £1.7billion drop. Quilter’s expert Shaun Moore rightly calls this a “policy backfire”. It’s another Rachel Reeves horrorshow.
Taxpayers are simply refusing to play ball. Instead of realising gains, many are sitting tight and hoping a future Chancellor will reverse Reeves’s hike. The Treasury ends up with less tax, not more.
The exact same thing is now happening with inheritance tax, after Reeves unveiled plans to slap IHT on unused defined contribution pension pots from April 2027.
HMRC data shows people are already taking evasive action, two years before the rule change kicks in.
In the first quarter of 2025 alone, 672,000 retirees yanked out a total £5billion. That’s a 25% jump in value compared to the same period in 2024 – and the highest since pension freedoms began in 2015.
Reeves’s policy is not just counter-productive, it’s cruel. Bereaved families now face double taxation on the same pension pot.
First, 40% IHT would be due on anything above the £325,000 threshold (or £500,000 with the residence nil-rate band). Then beneficiaries would also pay income tax on withdrawals at their marginal rate – up to 45%.
That means the taxman could grab two-thirds of a loved one’s pension, or more in some cases.
Governments spent years encouraging people to build up private pension pots to ease the pressure on the state. Now Reeves has sent the opposite signal: don’t bother.
What’s the point if HMRC ultimately snaffles most of it?
Other tax hikes could also hit revenues, such as Reeves’s raid on wealthy foreign “non-doms”, as well as hare-brained proposals for a wealth tax. Their targets may flee overseas.
HMRC’s own figures suggest the damage has already begun. Pensions are supposed to support people across 20 or 30 years of retirement, but now retirees are being nudged into draining their savings quickly.
Former pensions minister Ros Altmann calls this a “disaster”, warning it creates a dangerous incentive to “take the money out as soon as you possibly can”.
The long-term consequences could be dire. Pensioners who burn through their cash may have to fall back on the state later in life. That could mean more benefit claims, higher social care bills and even greater pressure on taxpayers in the future.
Worst of all, it may not even work. Reeves is banking on raising £1.5billion a year from pensions inheritance tax by 2030.
But now that everyone knows what’s coming, she may get a lot less than that, while leaving pensioners poorer in the process. Hiking taxes is not an easy answer. None of her choices are.
