Will Rachel Reeves hike taxes in her first Spring Statement?
Chancellor Rachel Reeves is set to make her first Spring Statement next week, and rumours are starting to swirl that the tax hikes could be on the cards as she tries to get the government debt under control.
Given the Chancellor’s commitment to just one major fiscal event a year the Spring Statement is intended as an update rather than a major fiscal event.
However, this year’s public sector net borrowing is tracking £12.8bn above the Office for Budget Responsibility’s (OBR) previous forecast, while the current budget deficit is £10bn above the October baseline.
Lower tax receipts and higher spending have blown a hole in Reeves’ carefully constructed fiscal rules.
As a result, analysts have started to speculate that the Spring Statement could include major fiscal changes, either spending cuts or tax hikes.
UBS analysts expect Reeves to announce measures just enough to restore fiscal headroom close to the level of the Autumn Budget, with cuts and tax rises to bring in around £10bn to £15bn.
Meanwhile, Deutsche Bank senior economist Sanjay Raja expects £14.5bn of cuts from Reeves, comprising welfare cuts, departmental efficiency savings, and NHS reforms.
What could change in the Spring Statement?
The Treasury has not ruled out potential tax rises in the Spring Statement.
One aide told the Financial Times that Reeves was taking “nothing off the table” despite the Chancellor’s previous pledge not to ” come back with more tax increases.”
At the Budget last October, Reeves pledged to end the freeze on tax thresholds in 2028, preventing ‘fiscal drag’, where people are moved into higher tax bands by inflation and is often described as a ‘stealth tax.’
However, according to the IFS, extending the freeze in National Insurance and income tax thresholds by two years could raise £5bn in 2028 and £10bn in 2029.
“Having previously ruled out increases to people’s rates of income tax and national insurance, as well as a VAT hike, there aren’t many other options,” said Rob Morgan, chief investment analyst at Charles Stanley.
Had it risen with inflation over the last five years, the income tax personal allowance would be over £15,000 by now rather than the current £12,570, while the higher rate tax threshold would jump from £50,000 to over £62,000.
Other potential tax changes in the Spring Statement include amending the payments on account rules for taxpayers who are within the Self-Assessment tax system.
“At present, someone is only liable to make payments on account, if their tax bill is more than £1,000 or if less than 80 per cent of their income tax bill has not been deducted at source,” explained Blick Rothenberg director Robert Salter.
“These rules could be modified so that payments on account were required if a tax return showed an income tax liability of under £500 or if less than 90 per cent of the income tax due had not been accounted for via deductions.”
Salter also noted that Reeves could increase the penalties associated with the late submission of Self-Assessment tax returns, which has not changed since it was set at £100 in the 1990s.
The Chancellor could also look to shift the boundaries used for ISAs. Rumours suggest a £4,000 annual cap on cash ISA contributions to encourage investment in the stock market.
However, recent reports suggest that Reeves has abandoned these reforms after a media outcry and will not include them in the Spring Statement.
The City has also called for the scrapping of stamp duty on purchases of London-listed shares, although the Treasury has ruled this out.
Reeves may also respond to the significant pushback on the planned measures around inheritance tax announced in October’s Budget.
Last year, the Chancellor introduced a cap on exemptions on business assets and agricultural land at a combined £1m, with a lower 50 per cent relief after that, from April 2026.
Plans to bring pensions into the scope of inheritance tax from 2027 were also slammed so they could be reassessed in the Spring Statement.
“Having digested industry views, the Chancellor may seek to steer away from what stands to be a clunky and inefficient process while keeping to her overall principles,” added Morgan.