The view from our economist

Autumn Budget 2025 is shaping up to be every bit as consequential to businesses, households, financial markets and the economy as last year’s “biggest budget in a generation”.

The macroeconomic backdrop has undoubtedly become more challenging. A big forecast downgrade by the OBR has more than eliminated the wafer thin £10bn of headroom the Chancellor left herself in March. Throw in the policy U-turns, which will result in higher benefits spending, some further giveaways on benefits, selected tax cuts and a sensible desire to increase that headroom and we think the Chancellor will have to tighten fiscal policy by £30-£40bn at the budget.

That is a tough ask while sticking to the manifesto pledges. This might be why speculation is building that the government could take the tough decision to increase income tax to make a dent on the deficit and help to give the Chancellor extra fiscal headroom she needs.

Without such a move, it’s tricky to make the numbers add up, but not impossible. She could navigate this fiscal maze with a complicated mix of future spending restraint, fiscal drag, a base broadening of National Insurance Contribution (NICs), sin taxes, capital taxes and pension reform along with a smorgasbord of smaller tax increases, with any inflation impact being partly offset by cutting VAT on energy bills and lower household incomes.

Get it right and the reward could be a self-reinforcing cycle of greater credibility, lower gilt yields and an end to confidence-sapping speculation about future tax rises. Get it wrong and we could see a negative reaction from the market, another counter-productive policy-induced inflation surge, and ultimately, another “big” budget this time next year.

Tom Pugh, Chief Economist

Autumn Budget 2025 - the 'Uncertainty Budget'

A common complaint about budgets in the modern era is that they have become too boring and predictable. This is not the case for Autumn Budget 2025, with reports that Rachel Reeves is considering more than 100 different tax and spending measures. As Tom references above, we are looking at a fiscal hole of between £30-£40bn, but how she balances the books while boosting growth and productivity, as well as managing inflation, is the big question.

Will income tax rates increase in the Autumn Budget 2025?

Despite the government’s pre-election manifesto pledge not to increase taxes for working people, there have been growing calls for the Chancellor to do just that. Increasing both the basic rate and the higher rate by 1 or even 2p could go a long way to addressing the Chancellor’s deficit. If she does raise the basic rate of income tax, Rachel Reeves would be the first Chancellor to do so since 1975.

Tweaking thresholds to boost revenues

Basic and higher rate thresholds for income tax have already been frozen until April 2028, bringing more people into the income tax net. Extending this freeze to the end of the Parliament could generate substantial additional revenue through fiscal drag as incomes continue to rise. This freeze could also be extended to NICs thresholds. However, a 2p rise in income tax might give the Chancellor room to remove the freeze on personal allowances and basic rate band, thereby allowing her to argue that she has protected the lowest earners from the income tax rises.

Alternatively, another possible revenue raising move would be to lower the threshold at which the 45% tax rate begins, while reinstating the personal allowance for those earning over £100,000. This could be billed as reducing some of the complexity in the tax system and would smooth out the somewhat spiky marginal rates which currently apply, but is unlikely to do much to fill the deficit.

Expanding the NICs base

There have been a number of rumours about NICs being extended to landlords as well as to those past state pension age and partners in professional services partnerships. While such measures are likely to be revenue raising, caution is needed if we are to avoid a repeat of last year’s inflationary budget, and the knock on effect to an already sluggish housing market.

Reducing employees’ NICs at the lower rates, combined with an increase in income tax rates, could be seen as a way to minimise the impact on 'working people' whilst increasing the tax liabilities of individuals whose income is not subject to NICs (or subject to a lower rate) such as the self-employed, landlords and pensioners. The difficulty for the Chancellor will be that employees make up most of the tax paying public so such a move would impact the benefit to the Treasury of putting up income tax while still risking significant the political fall out.

Alternatively, a 2p rise in income tax could be offset by a corresponding 2p decrease in employees’ NICs. This would be a step towards the longer term goal of aligning income tax and National Insurance into a single unified charge on income. However, it could discourage landlords to invest, squeezing the rental market further, and deter business start ups.

Modest increase to capital gains tax

Both capital gains (CGT) and inheritance tax (IHT) saw significant changes in last year’s Budget, but there is still scope for the Chancellor to go further. The challenge is that many of the measures are unlikely to help fill the fiscal deficit.

By HMRC’s own calculations, an increase in CGT rates of 10% would actually cost the Treasury money, as people decide to hold on to assets they may otherwise have sold. A more modest rise, however, between 2-4% could provide some political cover for any increases in income tax.

Changes instead to CGT reliefs, or the uplift in value on death, are also an option for the Chancellor. The challenge with this is the very high rate of tax some assets may be subject to when sold following inheritance, if also subject to IHT.

A possible exit tax for individuals leaving the UK

The introduction of an exit charge (being billed as a “settling up charge”) on the assets of those leaving the UK is also being considered. Unlike some other possible changes to CGT and IHT, this has the potential to be a significant revenue raiser, with reports that it could bring in up to £2bn. Under this measure, those leaving the UK would pay CGT on the increase in the value of their assets up to the date of their departure. To balance this charge, the Treasury could choose to exempt from CGT any growth in value of assets which arose prior to an individual becoming UK resident, thereby arguably increasing the UK’s attractiveness for wealthy individuals looking to immigrate.

Changes to IHT lifetime gift allowance

We could see a cap on the total value of gifts a person could make free of inheritance tax in their lifetime as well as a possible change to or even removal of the exemption from IHT for gifts made out of the donor’s income. An increase in the period during which gifts made during a donor’s lifetime can become subject to IHT (or further IHT) on death (from seven to ten years, potentially) may also be considered.

None of these changes are likely to significantly move the needle in terms of the amount the Chancellor needs to raise, but further piecemeal changes to the IHT rules are likely to negatively impact business owners already hit by the changes to business property relief and agricultural property relief in last year’s budget; as well as impacting confidence in the stability UK inheritance tax regime.

Is now the time?

Reform of pension taxation has featured in predictions for fiscal events for the past 10 years or more; it is fraught with difficulty and can be politically challenging.

Currently, up to 25% of a pension (capped at £268,275) can be withdrawn as a tax-free lump sum. This disproportionately benefits higher earners. Lowering this cap could be a revenue raiser but any change needs to be balanced with the incentive to save for retirement.

There is also speculation that the benefit of making pension contributions through salary sacrifice schemes will be curtailed or removed altogether. Currently no NICs are payable on the amount sacrificed or the employer contributions to a pension scheme. If this relief is removed or restricted, employers may decide that any contributions above the statutory minimum can no longer be funded.

Could we see changes to VAT?

The VAT registration threshold has increased by only 10% over the last decade, yet it remains high compared to the rest of Europe and the OECD countries. A significant reduction would remove a possible barrier to the continued growth of many small businesses, but resultant price increases may be more than some small businesses can weather.

Although the government pledged not to raise the rate of VAT, the Chancellor could seek to broaden the base by changing what supplies qualify for reduced or zero rates.

Many businesses will be interested in the government’s expected response to the e-invoicing consultation; particularly whether this is to be made mandatory, as well as whether real-time reporting will feature.

Gambling duties reform

Reform of the taxation of gaming companies is expected, following consultation earlier in the year. The impact of any changes on consumer behaviour and operator profitability is uncertain, so careful design is needed.

The roadmap is set

The 2024 Corporate Tax Roadmap committed to maintaining both the headline rate and the small profits rate of corporation tax at current levels for the duration of the Parliament. Maintenance of core features of the corporation tax system, including permanent full expensing, the £1m annual investment allowance and generous reliefs for research and development expenditure and patent box was also confirmed.

Maintaining that certainty for business confidence and investment is key, so no major changes to corporation tax are expected. However, the Roadmap did confirm that the bank tax regime would be kept under review. The financial services sector has been referred to by the Chancellor as ‘one of our big success stories in the UK’. She won’t want to discourage growth in this area, or impact business lending, however she could look to reverse a 5% cut to the bank surcharge rate made by the previous government, or restore a portion of this.

The Chancellor may announce changes to land remediation relief to encourage the development of brownfield sites. Tweaks to transfer pricing rules are also expected, including new reporting requirements, as well as extending the rules to medium sized companies in certain circumstances, by changing the small and medium sized companies’ exemption to apply only to small companies. Other changes may seek to ease the administrative burden on businesses by removing the requirement for UK to UK transfer pricing and easing complexity in the corporate interest restriction rules. None of these are expected to be major revenue raisers.

Discover our industry analysis

A taxing property problem

There isn’t much love for Stamp Duty Land Tax (SDLT). It is one of the biggest barriers in the housing market as it locks up the property chain and market liquidity. Temporary changes and reliefs have been announced at budgets in the past, but the distortive effect on the property market overall suggests it’s not the best way to address the problem.

Reducing or removing the SDLT burden may stimulate the market with more transactions and make development more viable to increase housing supply. But, removing SDLT leaves a fiscal gap, so what would fill the void?

• The introduction of a “mansion tax”? The ultimate form of such a tax is uncertain, with possibilities ranging from a small percentage annual wealth-tax style charge on the value of land and property over a certain minimum – variously considered to be as low as £2m or as high as £10m.
• Increasing Council Tax for some of the higher bands or introducing new bands or even a revaluation of some properties. Such reform could be done in conjunction with changes to SDLT for an overhaul of property taxes affecting homeowners.
• Alternatively, we could see restrictions to main residence relief on high value homes, resulting in capital gains tax potentially being payable where it is currently exempted.

The complexity and varying criteria of alternative property and wealth taxes will have a damaging impact on the market in different ways, especially in high-value areas like the South, without necessarily bridging the fiscal gap and adding further pressures for housebuilders.

Planning reforms need to go further

Planning reforms need to go further. The sentiment is right – cutting delays and getting Britain building faster – but this isn’t being felt on the ground. The amended Planning and Infrastructure Bill looks to address administrative burdens and local authority pushback; but broader structural challenges remain. Clarity on tax and support to tackle labour shortages are needed to stimulate activity and investment.

Could tax changes lead to a rental property shortage?

Increasing income tax on or expanding the National Insurance contribution base to include rental income has been mooted. While this could raise some much-needed revenue, it may be less than expected. Such a move could lead to more landlords selling up and leaving the market. Further reductions in rental properties would strain supply further, with recent pressures on landlords driving double-digit rent inflation from 2022 to 2024. This comes at a time when mobilising viable development faces multiple barriers such as planning, labour shortages, EPC regulations, a fragmented supply chain and lack of confidence from investors.

Peter Graham, National Tax Lead for Real Estate & Construction

Budget priority for the retail, hospitality and leisure sectors

Number one plea from retail, hospitality and leisure businesses is for the government to deliver on its pledge to overhaul the business rates system, and we are expecting an update during the budget. Consumer businesses need decisive wide-spread change, including introducing a lower, more manageable, permanent multiplier, but they might have to settle for short-term tinkering, such as targeted reliefs increasing or expanding.

U-turn on tax free shopping

Although unlikely, we could see a U-turn on tax-free shopping which would offer a helping hand across the sector, particularly to retailers, and give a welcome boost to the UK economy. International visitors are still coming to the UK as the luxury hotel market continues to see strong demand, but the retail sector is losing out as tourists hold off from splashing out on designer goods until the next leg of their European tour. Reinstating tax-free shopping could boost spending and tempt more tourists to visit the UK.

Wage pressure support

There’s a strong expectation that the national minimum wage (NMW) will rise, which will apply more pressure to wage costs following the hit from employer NICs last year, and recent increases to the real minimum wage. In addition, the Government continues to work towards one rate of NMW for all working adults by increasing pay for 18-20 years by an even greater percentage. If adopted, combined with the other proposed measures, it would not only acutely hit retailers, hospitality businesses and hoteliers, but could have an inflationary effect. This would leave interest rates higher for longer – leading consumers to continue to save rather than spend.

End in sight for tax relief for small packages

There have been rumours that the Chancellor could close a custom duty relief that allows small packages, worth less than £135, into the UK without being charged import duties. This move could curb the flow of cheap goods flooding the market – allowing UK retailers to compete on a level playing field which would be a welcome boost, but some care is required to ensure this doesn’t create friction at the border.

Jacqui Baker, Head of Consumer Markets

An alternative to fuel duty

Revenue from fuel duty continues to decline. With oil prices at their lowest level since early 2021, could we see the Chancellor take this opportunity to reverse the 5p fuel duty cut and align rates with the Retail Price Index? This is factored into the OBR’s forecast, so if the changes are deferred another year, then there is a real cost to find from elsewhere. In addition, the Chancellor needs to balance these aims with the inflationary impact an increase in transport costs could have on food prices.

Increasing fuel duty is only a short term fix to offset the growing deficit caused by declining fuel duty revenues, so it’s no surprise that introducing a pay per mile scheme is  being considered again, after being ruled out ahead of last year’s budget.

VAT cut on energy bills

Rumours suggest that cutting VAT on energy bills is being considered. This would bring down the cost of energy bills and have a deflationary impact giving consumers and the UK economy a boost. However, the UK continues to be reliant on imports which is fuelled by low domestic oil production leaving consumers vulnerable to price volatility. The clean energy industrial strategy has given a roadmap, but what is needed is targeted investment in UK renewable energy to support our transition away from fossil fuels.

In addition, we could see changes to the VAT on charging for electric vehicles (EVs). Currently there is a different rate when charging at home as compared with charging in public, So, would the Chancellor consider scrapping the reduced VAT rate of 5% on electricity for domestic charging points, bringing all EV points in line with the higher 20% VAT rate?

Energy profits levy

The energy profits levy (EPL) is a temporary additional 38% charge on oil-related activities, taking the combined rate of tax to 78%. Acknowledging the need for long term certainty for the energy sector, the government has recently consulted on a new, permanent measure to replace the energy profits levy (EPL) when it ends in 2030. The industry is calling for reforms to support investment and growth in this sector. Low oil and gas prices have contributed to a decline in revenue from the EPL, although declining production and investment are also playing their part.

Sheena McGuinness, Head of Renewables and Cleantech