The UK is preparing for a highly anticipated Budget next week, where the Chancellor, Rachel Reeves, must raise significant revenue to address a large fiscal shortfall while attempting to reassure markets and support a fragile economy. The focus has shifted from an outright income tax rate rise to a broader set of measures, dubbed "stealth taxes."
The consensus from pre-Budget speculation points towards targeted revenue-raising across different income sources, rather than a single, headline-grabbing rate hike.
The key tax measure is an extension of the freeze on Income Tax thresholds for at least two additional years. This policy, known as "fiscal drag," will raise billions as wage inflation pushes millions of individuals into higher tax brackets without any formal change to tax rates. This will increase the tax burden on ordinary working people. Furthermore, a likely measure to hit high-earners is the curtailment of tax relief on pension contributions made via salary sacrifice schemes, potentially capping the National Insurance (NI) saving perk.
Attention is turning to equalising the tax treatment of different income sources. Speculation includes applying National Insurance Contributions (NICs) to rental profits and the potential introduction of employer NICs on partnership profits (affecting law firms, accountancies, etc.). These measures are designed to raise revenue from sources currently not subject to NI, increasing the tax liability for landlords and high-earning self-employed professionals and partnerships.
Though a major reform is unlikely, a modest increase in Capital Gains Tax (CGT) rates or a reduction in the annual exempt allowance remains on the table, as does a potential restriction on Inheritance Tax (IHT) exemptions for lifetime gifts or relief on certain assets like those on the AIM market.
The initial market reaction has been jittery. After a last-minute reversal on a potential income tax rate rise, financial markets were unconvinced that the basket of smaller, targeted tax hikes would be sufficient to credibly plug the fiscal hole. This scepticism has led to a rise in UK government borrowing costs (gilt yields), indicating that investors are looking for greater fiscal certainty and a larger projected buffer for the Chancellor.
For the public and business owners, the reaction is a mixture of resignation and frustration.
The Public largely views the threshold freeze as a "tax rise by stealth," eroding disposable income across the board at a time when the cost of living is already high.
Business Owners are concerned that the cumulative effect of targeted taxes—especially on partnership and rental income—and the already high cost of employment will dampen entrepreneurial activity and further squeeze the rental property market, potentially passing costs on to tenants.
The Chancellor’s challenge is to deliver a Budget that meets the market’s need for financial discipline without fundamentally undermining the government's pledge to protect "working people" from new taxes.
We'll be publishing a review of the key highlights and tax announcements once the budget is announced next week - so keep on eye out for our blog!