Looking ahead to Budget 2025

When looking to raise meaningful amounts of tax quickly, Chancellors have historically looked to one of the three ‘workhorses’ of the tax system – Income Tax, NI and VAT. Collectively, these account for around 60 percent of total UK Government revenues. An increase of 1p in the basic rate of income tax would raise around £8 billion per year, for example, or increasing the standard rate of VAT by 1 percent could raise about £10 billion per year.

However, Labour’s manifesto put these taxes off limits. Labour could of course u-turn on its manifesto pledges to raise significant sums from one of these taxes – but Reeves appears to have no appetite for this.

Rather than u-turn completely, it’s possible Labour could instead ‘blur the edges’ of its pledges as it did when it increased Employer’s NI. It’s highly unlikely the Chancellor will touch Employer’s NI again so what further ‘blurring’ could be done? The most obvious area is Income Tax where the manifesto carefully referred to not raising rates of Income Tax – but was silent about further freezing thresholds. The current freeze is due to end in April 2028, but the Institute for Fiscal Studies (IFS) has estimated a further two-year freeze could raise c£10 billion in 29/30.

A continued Income Tax threshold freeze would plug some of the fiscal deficit, but it won’t be enough.

The press is full of reports that HM Treasury is focused on reforms to encourage ‘fairness’ in the tax system – which seems to include, amongst other things, wealth taxes, exit taxes, removing private residence relief for higher value properties or changing pensions tax.

Whilst these would represent fundamental reforms, they also risk making the tax system even more complex and triggering unintended consequences such as wealth flight, stagnating the housing market or discouraging saving for retirement.

So what other options are out there? In June 2025 the Prime Minister said in an interview “I don’t think that you can tax your way to growth”. At the same time the Government doesn’t seem too keen on using tax policy as a lever to help encourage growth. 

To generate growth and allow tax revenues to increase organically will require some courage. It requires policies that will encourage companies to invest more in the UK, encourage individuals to work and spend more and encourage increased activity in some key areas of the economy such as housing.

Recent tax changes in the US will result in the US threat to give itself a significant competitive advantage over Europe and the UK when it comes to investment decisions, particularly in relation to intellectual property exploitation. Serious consideration should be given to whether the UK can offer some strategic incentives to turn the potential investment flight to the US around. For example, digital and tech is a key sector in the Government’s Modern Industrial Strategy but there are a lack of UK tax incentives for innovative software such as Artificial Intelligence.

The personal tax system is full of cliff-edges which discourage work such as the removal of the personal tax allowance and free childcare when income reaches £100,000, or the High Income Child Benefit Charge when income reaches £60,000. The VAT threshold is another cliff-edge that discourages many small businesses to grow.

Economists and think tanks have been almost universal in their condemnation of Stamp Duty Land Tax, which the ex-head of the IFS, Paul Johnson, described as “among one of our worst and most damaging taxes”. We are seeing some kite-flying on Stamp Duty Land Tax but the proposals being put forward risk making the housing market even more sticky at the top end. We need something else to encourage people to move and free up housing, as well as encouraging house building itself.

In recent days there has been a ‘mini-shuffle’ in some government posts. Pensions Minister Torsten Bell, who used to be the chief executive at the Resolution Foundation, has been given a key role advising the Chancellor on economic policy. Darren Jones has moved from Chief Secretary to the Treasury to Chief Secretary to the Prime Minister. James Murray (previously Exchequer Secretary to the Treasury) has replaced Jones and Dan Tomlinson, another Resolution Foundation alumnus, has moved into the role of Exchequer Secretary to the Treasury.

In the run-up to what is widely anticipated as being a difficult Budget, it will be interesting to see the impact of these personnel changes on policy.

Whatever the Government chooses to announce, this is its last chance to grasp the nettle and make deep and meaningful reforms before the next election. At the moment it is still difficult to see a coherent policy when it comes to tax. Rather than nibbling around the edges for tax revenue, a longer-term view of fundamental reform that will encourage growth should be adopted.

For further information please contact:

• Sharon Baynham
• Tim Sarson