Here we go… again. Autumn Budget v.2025 is imminent, and with it the predictable mix of rumour, speculation and full-blown fearmongering. Rather than get swept up in the noise, it’s worth taking a calm look at what the Chancellor is trying to do with this Budget.
What is the Government trying to achieve?
Fill the fiscal hole: The widely reported £30bn productivity downgrade that the government needs to address was recently revised by the Office for Budget Responsibility (OBR), which stripped £10bn off the figure. This translates into £20bn extra tax or borrowing.
Rebuild financial headroom: Jeremy Hunt’s March 2024 Budget left the UK with virtually no buffer for shocks. Reeves increased headroom slightly on taking office, but it remains extremely thin, and her March 2025 spending review barely shifted the dial. With bond yields wobbling, the Government knows this is a test of economic credibility: lack of headroom signals weak planning and a fragile state.
For this reason, economists estimate an additional £9bn of tax, on top of our £20bn figure, is needed to increase the Chancellor’s headroom.
Uphold the manifesto pledge not to raise taxes on “working people.”: This principle sits uncomfortably alongside the current fiscal reality. A 1 or 2 percentage-point rise in income tax would raise the needed revenue almost immediately, but it would also break a core Government pledge (again) and undermine public trust. Selling voters the idea of higher direct taxes in only Labour’s second year in office would be politically difficult. But the idea of cutting public services is also hard to push through.
A Chancellor faces a magic-trick-level challenge
Balancing all these objectives is no easy task. Reeves has taken the unusual step of giving a series of pre-Budget interviews – a first for a Chancellor – which has only intensified speculation about potential U-turns and broken promises.
The Government’s explicit strategy of increasing the cost of employment (through the Autumn 2024 NI rise and minimum wage growth), intended to push firms toward automation and training, is a contributing factor to the shaky labour market. Unemployment has risen to 5% – its highest since September 2021. While crises in public services remain visible and unresolved. Something is needed to plug the fiscal gap.
What options remain for the Chancellor?
Economists broadly agree that a messy patchwork of small tax rises would be the worst outcome, yet it cannot be ruled out. While different think tanks have produced a flood of suggestions, none are politically straightforward.
Income tax rises remain one of the few truly meaningful and reliable revenue levers but using them would break Labour’s pledge. Two thirds of voters have said they would want to see Reeves go if this key manifesto promise was broken.
Around the Labour Party, there are those making the case for increasing income tax. A recent Renewal article argued that instead, Labour should be more explicit in making the case for tax rises, highlighting three core principles for social democrats:
- The wealthiest should contribute the most, without leaning on the vague notions of a ‘wealth tax’.
- Taxes should be hypothecated to progressive aims, as New Labour did with NI for the NHS.
- Tax should be framed as the price of good public services, and the contribution we make as citizens.
Perhaps easier said than done while many are grappling with cost-of-living pressures and high inflation. Nevertheless, these arguments are being made around the Labour Party and may form part of the Chancellor’s argument when she stands up on 26 November.
There’s also a strong argument, and even consensus from policy experts across the political spectrum, for reform of the tax system and more strategic thinking around tax policy. The framework is overly complex, outdated and increasingly misaligned with how people live and work today. A patchwork tweaks rather than a few simple measures would only exacerbate matters.
Of course, no more than a handful of people will know her plans before Budget Day. The rest is speculation – which brings us to the most immediate danger for savers.
Rush to judgement – or wait and see?
Every year, rumours spark panic, and some people make irreversible decisions. This year, chatter about changes to tax-free cash (TFC) has already led some to consider cashing in pensions before the Budget. Some have already acted, despite both HMRC and the UK Financial Conduct Authority being crystal clear:
- Once TFC is taken, it cannot be paid back into a pension and regain the tax benefits.
- Regret after the Budget does not fall within cancellation rights.
Similar rumours last years caused people to make hasty withdrawals that proved unnecessary. And the echoes the 2019 general election, when fears of a Jeremy Corbyn government changing pension taxation pushed some into early – and costly – decisions.
Yes, even a broken clock is right twice a day. It is possible that a change will validate early action. But managing your future via rumour is gambling, not planning. Better to act on facts, not fear.
As tax advisers often say: don’t let the tax tail wag the financial planning dog.
(All right, tax advisers aren’t known for witty wordplay).
Written by Alex Ranahan, Tax Reporting Analyst at Financial Software Ltd (FSL).
Alex has ten years’ experience as a tax adviser and analyst. He is accredited by The Association of Taxation Technicians and is co-chair of the Tax Committee for The Investing and Saving Alliance.
This article originally appeared in IFA Magazine.