As Chancellor Rachel Reeves prepares her first full budget for November 26, 2025, all eyes are on how she plans to raise as much as £30 billion a year without derailing economic growth or shaking investor confidence. While Reeves has floated the idea of moderate spending cuts, most analysts expect any real fiscal progress will come from tax changes—some subtle, others potentially headline-grabbing.
Here’s a breakdown of the tax options reportedly under consideration and what they could mean for taxpayers, businesses, and the broader UK economy.
Table of Contents
Income Tax
Reeves and Prime Minister Keir Starmer had previously pledged not to raise income tax, VAT, or national insurance rates for “working people.” But with economic conditions worse than expected, that line appears to be softening.
Several options are being considered:
- A 1 percentage point rise in all income tax bands, potentially generating £8 billion a year.
- A 2p increase to income tax, paired with a 2p cut in national insurance contributions, targeting groups like landlords and pensioners.
- Extending the current freeze on income tax thresholds by another two years to 2030, a move that could raise about £8 billion as more people are dragged into higher tax brackets due to wage inflation.
If the government avoids a direct tax rate hike, the threshold freeze could serve as a “stealth tax” that quietly increases tax receipts over time.
VAT
VAT could also be on the table, though any moves here come with significant inflation risks:
- Simplifying the system by removing zero or reduced rates on items like children’s clothes or food could raise revenues but push prices up.
- Lowering the VAT registration threshold for small businesses would bring more firms into the tax net and potentially remove growth disincentives for those trying to stay under the limit.
Still, tinkering with VAT is politically risky, especially in a cost-of-living crisis.
A New Tax?
A more creative option is a new ring-fenced tax, possibly linked to public health or NHS funding. While this could appeal to voters if framed as “paying directly for services,” it would still be seen as bending or breaking Labour’s prior no-tax-hike promise.
Wealth and Capital Gains
While Reeves has ruled out a full wealth tax, she has hinted that the wealthiest will be asked to pay more. Ideas include:
- Raising capital gains tax rates, potentially aligning them with income tax bands.
- Tightening rules around dividend income or business asset reliefs.
Reeves has repeatedly said those “with the broadest shoulders should pay their fair share,” suggesting the focus will remain on high earners and asset-rich individuals.
Property Taxes
The UK’s current stamp duty system and council tax structure are both widely viewed as outdated and inefficient. Potential reforms could include:
- Increasing property taxes on high-value homes.
- Reducing stamp duty to make buying and selling homes more fluid.
Major reform here would be politically bold but could unlock housing market activity and modernise revenue collection.
Pension Tax Relief
Pension perks could also come under pressure:
- Levying national insurance contributions on employer pension contributions.
- Reducing the 25% tax-free lump sum retirees can withdraw.
However, these changes would risk discouraging pension saving—a move that could be unpopular among both workers and businesses.
Savings Accounts
The ISA (Individual Savings Account) system may be tweaked to shift investment behaviour:
- Reducing the tax-free cash ISA limit could push savers toward stocks and shares, helping the UK capital markets.
- Such a move would likely generate only modest revenue but could have broader financial policy benefits.
Professional Partnerships
Reports suggest Reeves is also eyeing limited liability partnerships (LLPs), used commonly by law and accountancy firms:
- Raising tax rates on LLP members could raise several hundred million pounds.
- This has already triggered opposition from professional bodies concerned about competitiveness and retention.
Banking Sector
There’s growing pressure to raise taxes on banks, particularly to reclaim some of the profits earned from interest on reserves held at the Bank of England.
- While this could raise several billion, it may also deter lending and harm the UK’s financial competitiveness.
- Reeves has acknowledged the need for a “competitive environment” for finance, so any move here would be carefully calibrated.
Sin Taxes
Traditional “sin taxes” may also be adjusted:
- Increases on alcohol, tobacco, gambling, and vaping.
- New or higher levies on plastic, sugary drinks, or air travel.
While these taxes can raise money and promote health/environmental goals, they may also change consumer behaviour—limiting how much they actually raise.
Fuel Duty
Fuel duty has been frozen since 2011, costing the Treasury billions each year:
- Lifting the freeze could bring in significant revenue—up to £25 billion annually.
- But politically, it remains extremely sensitive, with past protests showing the potential backlash.
Summary
Rachel Reeves has a wide range of tools at her disposal—but none without trade-offs. Some, like freezing thresholds or reforming capital gains tax, could quietly raise billions. Others, like changing fuel duty or removing VAT exemptions, carry significant political and economic risks.
With the budget due on November 26, 2025, the balance Reeves must strike is a delicate one: raise enough revenue to stay credible in the markets, without alienating voters or harming growth in an already fragile economy.
FAQs
Will income tax rise in 2025?
It might. Options include rate hikes or freezing thresholds.
Is there a new wealth tax coming?
No, but higher capital gains tax is being considered.
When is the UK budget date?
The budget will be announced on November 26, 2025.
Will VAT go up in the UK?
Possibly. Ending exemptions is being discussed.
Could fuel duty finally rise?
Yes, lifting the freeze could raise up to £25bn annually.
