With just one week left until Chancellor Rachel Reeves’ second Budget, Tom Selby, director of public policy at AJ Bell, comments on the task she faces against a difficult fiscal backdrop:
“Labour’s pre-election commitment to end the ‘chaos’ of the previous government and deliver long-term stability has felt a distant memory in the build-up to Rachel Reeves’ second Budget as chancellor. There has been more kite-flying in recent months than you’d expect to see on a windy day in Cornwall, with the Treasury flitting from a manifesto-busting income tax hike one day to a ‘smorgasbord’ of smaller tax increases the next.
“All of this is set against a brutal fiscal backdrop, with anaemic economic growth and persistently high borrowing costs leaving the chancellor scrabbling for an estimated £20 billion of extra revenue to make her sums add up. And if the bond market decides Reeves is failing to take an iron grip on the public finances, there is the real risk of a sell-off, which would send the cost of mortgages and government debt skyrocketing.
“Like a tightrope walker without a harness, there is danger wherever the chancellor turns. If she attempts to appease increasingly mutinous Labour backbenchers by sticking to the manifesto and not raising income tax, National Insurance or VAT, the revenues from the measures she brings forward will be less certain and the bond vigilantes could take flight. Which could, in turn, mean the chancellor is forced into a third painful Budget in 12 months’ time.
“If, on the other hand, she breaches the manifesto in a bid to stabilise the public finances, her political opponents will have a field day and Labour’s chances of re-election in 2029 could take a terminal hit.
“In short: whatever path Reeves chooses, this is set up to be one of the most consequential Budgets in modern times. For the chancellor and the prime minister, it feels like make or break time. For taxpayers, there is little doubt that this is going to hurt – the only question is how much?”
One week to go until the Budget – what’s on the table?
With one week to go before a crucial second Budget for the chancellor, AJ Bell’s experts take a final look at what could make up the government’s reported ‘smorgasbord’ of revenue raising measures. These options include:
- ISA reform
- Income tax
- National Insurance
- Pensions salary sacrifice
- Pensions tax relief, tax-free cash and the case for a ‘Pension Tax Lock’
- State pension reform
- Stamp duty exemption on UK shares
- Inheritance tax
- Mansion tax
- Capital gains tax
- Wealth tax
- Dividend tax
Tom Selby, director of public policy at AJ Bell:
“Few areas of policy have felt as chaotic as ISA reform in recent months. Having committed to simplification of ISAs in the run-up to the general election, the government now appears set on reducing the Cash ISA allowance – a change which would make the landscape more complicated, harden the divide between holding cash and investing for the long term, and be hugely unpopular at the same time. If the chancellor does announce a cut in the Cash ISA allowance, she will almost certainly need to ban transfers from Stocks and Shares ISAs to Cash ISAs on the day of the Budget. If she doesn’t, there is a real risk a change aimed at encouraging more people to invest will have the exact opposite effect in the short-term as people will be encouraged to transfer Stocks and Shares ISA funds into Cash ISAs while they still can.
“Reeves is also apparently keen on adding a UK element to her ISA reforms, although why this is necessary or how it might work in reality is anyone’s guess at this stage. The slightly bizarre, back-of-a-fag-packet approach to ISA reform is deeply concerning and raises the spectre of unintended consequences at a time the government has stated its intention to create a retail investing culture in the UK.
“Rather than rushing ahead with ill-thought-out ISA changes at this Budget, the chancellor needs to step back from the precipice and gather evidence on the best way to reform ISAs to support retail investors. There is no obvious benefit to investors, the economy or the government from ploughing on with half-baked reforms that are unlikely to be effective and will be widely criticised by the industry and the general public. The government is taking a long-term view on pensions reform through the Pensions Commission and ISA reform demands a similar long-term approach. AJ Bell has long argued that simplification is the key to boosting retail investing and a proper review focused on the behavioural barriers to investing would at least have a chance of delivering real-world benefits to investors and the UK economy.”
Rachel Vahey, head of public policy at AJ Bell:
“Last week it was reported that the chancellor has U-turned on manifesto-busting plans to increase income tax. It was previously suggested that the chancellor was considering an increase in income tax by either 1p or 2p across the board.
“Another option put forward was raising income tax but cutting the main rate of employee National Insurance by the same amount. That would raise tax rates for pensioners, landlords, savers and perhaps those with dividend income too, while offsetting the impact on workers.
“It’s now been floated that rather than an increase across the board, only higher or additional rate bands may be increased.
“Any change would be in addition to the almost nailed-on expectation that Reeves will extend the current freeze on tax thresholds beyond April 2028 for another two years.
“The damage this policy has already wreaked is plain to see, with over 8.3 million people now paying higher or additional rate tax, up over 45% since the start of the freeze in 2021. Extending this stealth tax further still will bring more working people and pensioners into paying higher rates of tax. According to the IFS, extending the freeze beyond 2028 would raise £8.3 billion in 2029-30.”
Danni Hewson, head of financial analysis at AJ Bell:
“One of the government’s key election pledges was not to increase National Insurance contributions, but at the last Budget Rachel Reeves found a way around that pledge by insisting it only meant employee contributions.
“With every potential source of income evidently up for discussion, could Rachel Reeves and her team sell a return to pre-2024 levels of National Insurance? Such a move would be extremely unpalatable with a Labour party that has promised to raise living standards for working people. A pill that might be easier to swallow would be to change the tax system to impose a new charge on those using limited liability partnerships (LLPs) – a designation which means they are taxed as if they are self-employed.
“However, recent reports suggest the chancellor has moved away from this potential measure, as it risks alienating another tranche of doctors at a time the government is fighting to bring down NHS waiting lists. It could also have a knock-on effect to the amount of capital available to invest in UK start-ups and scale-ups – innovative businesses that are vital for economic growth – for a relatively small amount of revenue gained for the Treasury.
“But there is another group which could find themselves facing the prospect of paying NI, and that’s pensioners. No National Insurance is levied on any pension income and even those who continue to earn a salary after they reach state pension age are not subject to the tax, no matter how much they earn.
“There has been a lot of debate about the generational wealth imbalance – the burden that working age people are having to shoulder in order to pay for an ageing population – so it might not be too far a stretch for the government to consider taxing those with gold-plated pensions or those who choose to continue working to supplement their retirement income.
“Though when you consider the furore caused by last year’s move to cut the winter fuel allowance for anyone not receiving pension credit or other means-tested benefits, this feels like one fight the government is unlikely to pick.”
Charlene Young, senior pensions and savings expert at AJ Bell:
“Thousands of employers currently use pensions salary sacrifice as a way of efficiently paying pension contributions while cutting National Insurance costs for them and their employees.
“The dual tax and NI advantages mean pension salary sacrifice has frequently come under scrutiny, as the government searches for opportunities to reduce tax reliefs and boost revenue without explicitly raising rates.
“Reports indicate that reform of salary sacrifice pension schemes could be one of the ways Reeves chooses to dance around Labour’s manifesto promises to boost the public finances.
“Rather than an all-out ban on using salary sacrifice, one option on the table is a £2,000 cap on the amount of earnings that can be exchanged for pension contributions that benefit from a National Insurance exemption.
“Introducing the cap could reportedly raise up to £2 billion a year, but it reduces take home pay for pensions savers and runs the risk of them having less in their pension pots at retirement. Our analysis shows that someone aged 35 earning £50,000 a year could face a hole in their pension of £22,060 by age 65 under these plans. This assumes they already have a pension fund of £30,000 and save an overall contribution of 5% personally, with another 3% coming from their employer. The black hole rises to over £37,000 or even nearly £50,000 if they are already a higher earner on £75,000 or £100,000 respectively.
“Any changes would be seen as another attack on employers. HMRC-commissioned research earlier this year presented employers with different scenarios for reforming pensions salary sacrifice. Employers reacted negatively to all of them, saying that removing reliefs would wipe away the financial benefits of salary sacrifice, and lead to lower pension savings and workers’ morale.
“Any potential changes to pensions salary sacrifice should not only take account of the immediate impact, but also consider what it means for the future of pension savings and Brits’ retirement income. Given the significance of this issue, it makes sense to leave such a major decision until the Pensions Commission has concluded its work.”
Pensions tax relief, tax-free cash and the case for a ‘Pension Tax Lock’
Tom Selby, director of public policy at AJ Bell:
“There are few areas crying out for long-term stability more than pensions. Reports that Reeves will not alter tax-free cash entitlements at this year’s Budget at least provides a degree of respite, but without a firm commitment from government these confidence-sapping rumours will inevitably keep bubbling to the surface.
“This constant uncertainty has real world consequences, with the industry reporting significant spikes in contributions and tax-free cash withdrawals ahead of the last two Budgets. AJ Bell analysis shows that someone who took out their tax-free cash and put the money in a savings account would be £63,000 worse off in 10 years’ time compared to if they had left the money in their pension, showing that knee-jerk decisions made off the back of speculation can be damaging to individuals’ long-term saving.
“Instead of stumbling from Budget-to-Budget with constant speculation about pensions tax-free cash and tax relief on contributions, the chancellor should make a long-term commitment to a Pension Tax Lock – a pledge not to change tax-free cash entitlements or tax relief on contributions, at least for the rest of this Parliament. This would very clearly put the government on the side of hard-working savers and would cost nothing to deliver. The level of public support for such a measure is clear, with over 20,000 people signing AJ Bell’s petition calling for a Pension Tax Lock in a matter of months.”
Tom Selby, director of public policy at AJ Bell:
“For a chancellor desperately digging down the back of the sofa for spare cash, the £150 billion and growing cost of providing the state pension will always be a tempting target. There are two obvious ways the government could reduce state pension spending – ditching the triple lock or accelerating planned increases in the state pension age. However, both would come with a hefty political price, particularly in light of the opprobrium the government faced over the winter fuel payments fiasco.
“A review of the framework to set the state pension age is currently underway, with the call for evidence ending on 24 October. This could pave the way for a faster increase in the state pension age to 68, currently pencilled in for the mid-2040s, and even further rises beyond that age. However, Reeves might not want to grasp that particular nettle given the political storm she is already having to weather.
“The triple lock was noticeably absent from the terms of reference of that review and Prime Minister Keir Starmer has repeatedly pledged to keep it in place for the rest of this Parliament. However, at some point politicians will need to establish what the policy is aiming to achieve and set a trajectory to, at the very least, remove the 2.5% underpin.”
Stamp duty exemption on UK shares
Laith Khalaf, head of investment analysis at AJ Bell:
“Reports suggest the government is considering making new UK stock listings exempt from stamp duty for their first three years on the market.
“Investors currently pay 0.5% stamp duty on UK share purchases, which runs counter to Rachel Reeves’ aim to revive the UK stock market and encourage new listings. Granting an exemption on newly listed companies would reduce a significant barrier to investing in the UK and potentially attract a broader pool of investors. It would also encourage more companies to list, knowing there is less of a tax deterrent in their first few years on the market.
“The government is keen to get more people investing instead of simply sitting in cash. Listing rules were relaxed in 2024 and offering a three-year stamp duty holiday on newly listed stocks might be considered another step on the journey towards greater retail participation in the UK stock market.
“However, the chancellor could be bolder and widen the exemption from stamp duty to all UK shares, as it’s a tax which explicitly deters investment in UK companies at a time when government policy is aimed at doing precisely the opposite.
“If removing stamp duty on all UK shares isn’t palatable for a Treasury scrabbling around for every penny it can find, then it could consider a diluted version of this policy. For instance, removing stamp duty on shares within an ISA would cost somewhere in the region of £120 million, according to an estimate based on stamp duty paid by AJ Bell customers. This is a relatively small sum in government spending terms but would help to funnel more money into UK-listed companies by reducing the penalty the government bizarrely places on domestic stock investment.”
Rachel Vahey, head of public policy at AJ Bell:
“Reeves made sweeping changes to inheritance tax at her inaugural Budget, with pension savers and farmers being hit even harder by the country’s most-hated tax.
“But as the dust settles on last year’s proposals, there are new rumours bubbling. Reports suggest the Treasury is considering tweaking the controversial inheritance tax (IHT) reforms for farmers, by increasing the tax threshold from £1 million to £5 million, which could result in smaller farms escaping the tax.
“Unfortunately any hopes of a similar U-turn for pension savers is unlikely. However, unless the Revenue chooses to change the way IHT is applied to pension funds, thousands of families will in future be faced with a tax admin nightmare of the worst kind, at the worst possible time.
“The impact of this policy is already being felt. Many advisers are working with their clients to mitigate IHT by gifting money from their pension to loved ones, in anticipation of pensions being subject to the tax from April 2027.
“As she rifles around for ways to raise taxes, Reeves’ attention could be caught by the current rules on gifting, and she may change the rules on tapering relief, pushing the seven-year period out to ten or even 12 years. The Treasury could also cast a beady eye over the rules for gifts from ‘normal expenditure out of income’, to see if tightening up this gifting allowance could reap them some additional tax revenue.”
Laith Khalaf, head of investment analysis at AJ Bell:
“There have been rumours the chancellor may look to levy an annual tax on high value properties, or charge the owner’s capital gains tax (CGT) upon sale. Clearly the wealthiest would be hardest hit by CGT on high-value properties. But there would likely be a knock-on effect for middle income families because anyone with a big tax liability may opt to sit tight in their property, causing a log jam in the housing ladder below them.
“It’s far from certain that such tax changes will take place, but if they do, much will depend on the precise threshold at which CGT becomes payable in terms of the number of people affected. Even if such a ‘mansion tax’ is set at a high level, it would naturally cause people on middle incomes to worry it was just the thin end of the wedge, and the next time the government needs a bit of money they could just lower the threshold. Homeowners would also need to keep records of the costs of improvements they made to properties in order to offset them against any capital gains tax. That would be the case even for those with properties under the threshold, in case one day those houses grow in value enough to be drawn into taxation.
“Tax reform would be a laudable aim for Rachel Reeves to pursue, but it may also prove challenging while raising tax revenues at the same time, both politically and financially. Property taxes in particular are highly emotive and likely to elicit a strong reaction amongst voters if they are seen to be rising. For that reason they would normally be a policy of last resort, except for the fact the government has repeatedly ruled out increases to income tax, National Insurance or VAT.”
Laith Khalaf, head of investment analysis at AJ Bell:
“Rachel Reeves may have unfinished business with capital gains tax (CGT). Having pushed rates up a bit in the last Budget, the chancellor may be tempted to engage in a more full-blooded attack on asset gains to drive some much-needed revenue for the Exchequer. Equalising capital gains tax rates with income tax rates has been widely touted for a while, and may lead the OBR to forecast a few extra quid coming into the Treasury as asset prices rise.
“By announcing the tax ahead of its implementation, the chancellor can almost certainly boost short-term tax receipts as investors crystallise gains before higher rates of tax come in. However, there is some doubt over whether raising capital gains tax is good for tax revenues in the long term. Higher rates of CGT will encourage more people to shift money to vehicles where they don’t pay it, like ISAs, gilts, and primary residences. It also discourages entrepreneurship and investment in productive assets, something which cuts across the chancellor’s plans to boost economic growth and the UK stock market.
“Capital gains tax also doesn’t currently apply on death, so higher rates will probably mean more people holding onto assets into their old age when they might otherwise sell them and pass them on to the next generation. Of course, it’s possible Reeves might choose to close that loophole too, but after increasing inheritance tax on pensions and farms, that might be a death tax too far. Much will depend on how much money Reeves needs to find to balance the books. It may be she simply has to pick the least worst options from an unappetising menu.”
Laith Khalaf, head of investment analysis at AJ Bell:
“As things have looked increasingly tight on the fiscal side of things, partly a result of Labour U-turns on the winter fuel allowance and welfare spending, the idea of a wealth tax has reared its head and been given some oxygen by former Labour leader Neil Kinnock. More than 30 sitting MPs signed an Early Day Motion calling for a 2% wealth tax on those with assets above £10 million, many of them on the Labour benches. On the face of it a wealth tax is an appealing idea. Indeed, research by AJ Bell suggests that introducing a wealth tax has considerable net support, with over two-fifths (44%) of Brits saying they’d be in favour of a ‘wealth tax’ of some form being announced at the Budget*. It targets a small group of very wealthy individuals for whom paying a bit more tax won’t mean hardship, but as ever, the devil lies in the detail.
“Part of the problem rests in which assets to include. Family homes, pensions and private businesses aren’t always easy to value, and can’t easily be turned into cash to pay taxes. However, excluding certain assets from a wealth tax clearly creates a loophole and a strong incentive to store wealth in anything that’s not subject to the tax. A wealth tax may also be counter-productive by encouraging rich individuals to relocate elsewhere, taking their tax revenues and economic contribution with them. With a large portion of the tax falling on a small number of extremely wealthy individuals, it only takes a few tax whales to head for the horizon to deny the taxman a feast of blubber.
“Questions of fairness also arise. Wealth that’s been accumulated may well have been already subjected to income tax, capital gains tax, inheritance tax, or a combination of all three, so adding a wealth tax creates a state of at least double taxation. Meanwhile some couples will have their financial affairs arranged so that the lion’s share of the wealth sits in the name of one individual, even though it supports both of them. Other wealthy individuals with close-knit and sizeable families may be able to split their assets up to avoid or mitigate the tax.
“While it would only affect a small group of people, a wealth tax would likely still be a controversial measure, not least because those caught up by it probably wield a disproportionate amount of influence as well as money. It would be an odd choice for a government that is trying to promote wealth creation in the UK to bolster the economy, while adding a further layer of complexity to an already inscrutable tax system. But perhaps desperate times call for desperate measures.”
*Based on a nationally and politically representative survey of 2,050 UK adults, carried out by Opinium on behalf of AJ Bell between 23 and 24 October 2025.
Dan Coatsworth, head of markets at AJ Bell:
“There is chatter ahead of the Budget the chancellor might cut the amount of money individuals can earn from dividends before paying tax, as well as cutting the tax rate charged.
“Anyone holding investments outside of an ISA or pension can earn £500 from dividends before a tiered tax rate comes into force, based on an individual’s tax band. The range is 8.75% for basic-rate taxpayers, 33.75% for higher rate and 39.35% for additional rate.
“The dividend allowance has already been cut to the bone, so the nuclear option is to abolish it completely. That would be negative for investor sentiment, as would lifting the basic rate dividend tax to match the 20% lower rate of income tax.
“Reeves needs to tread carefully, given her desire to encourage more people to invest in the stock market. There is a risk that tweaking the system could backfire and discourage investment rather than drive more money into financial markets.
“There is also speculation the chancellor might consider charging National Insurance on dividend payments. The starting rate for National Insurance is 8% but employers pay 15% and there is a suggestion the latter rate could be used if Reeves presses the ‘go’ button on this dividend-related tax idea.”