Reports suggest that Chancellor Rachel Reeves faces a growing ‘black hole’ in public finances in the tens of billions, leading to mounting questions around which tax raising measures could be announced in her second Budget next month. With four weeks to go until the chancellor takes to the despatch box on 26 November, AJ Bell experts analyse some of the options on the table, including:
- Pensions tax relief, tax-free cash and the case for a ‘Pension Tax Lock’
- ISA reform
- State pension reform
- Income tax
- National insurance
- Pensions salary sacrifice
- Stamp duty exemption on UK shares
- Inheritance tax
- Mansion tax
- Capital gains tax
- Wealth tax
Pensions tax relief, tax-free cash and the case for a ‘Pension Tax Lock’
Tom Selby, director of public policy at AJ Bell:
“Rachel Reeves’ first Budget was preceded by feverish speculation over whether tax relief on pension contributions or tax-free cash entitlements could be in the firing line. Last year, the government allowed these rumours to fester, resulting in a significant increase in the number of savers accessing their lump sum in the months leading up to the Budget.
“A similar story holds true this year, showing that savers remain concerned about a cut to tax-free cash in this year’s Budget.
“In reality, cutting tax-free cash would be hugely unpopular and raise trivial sums for the Treasury, so a tax grab feels unlikely. Likewise, moving the goalposts overnight is almost unthinkable, so any change would almost certainly come with protections, perhaps similar to those put in place with previous cuts to the pension lifetime allowance. Nonetheless, concerns have clearly developed in the absence of a clear commitment from the government and the chancellor should use the Budget as an opportunity to show this government is committed to pension tax stability.
“AJ Bell recently launched a parliamentary petition, calling on the government to introduce a ‘Pension Tax Lock’ – a commitment to retaining key pension tax incentives for at least this Parliament. The fact the petition has attracted over 20,000 signatures in a matter of weeks demonstrates the strength of feeling across the UK on this issue.
“In its response to the petition, the government refused to confirm any plans regarding tax-free cash and tax relief, pointing instead to the Pensions Commission, which will make recommendations to the government on the broader questions of adequacy, fairness and sustainability. While this is a laudable long-term goal, it does little to address the uncertainty which savers face ahead of the Budget. At the very least, the chancellor should rule out fundamental changes to the pension tax system until after the Commission has delivered its recommendations.”
ISA reform
Tom Selby, director of public policy at AJ Bell:
“Rumours the Cash ISA allowance will be cut have been brewing for months, with most now expecting the chancellor to wield her Budget axe in a bid to encourage more people to invest for the long term. While this is the right policy goal for both individuals and the wider UK economy, reducing the Cash ISA allowance is the wrong way to achieve it. Rachel Reeves is also reportedly keen to reheat one of the worst ISA reform ideas in living memory – the so-called ‘UK ISA’.
“Tinkering with the Cash ISA allowance would add further complexity to the ISA landscape, and would be unlikely to deliver a meaningful shift in investing behaviour. Research by AJ Bell earlier this year found that just one-in-five would move to investing in the UK stock market if the Cash ISA allowance was reduced.
“AJ Bell has instead argued for radical ISA reform to help more people invest, starting with the merging of Cash ISAs and Stocks and Shares ISAs into a single main ISA product – a reform that would simplify the landscape and make it easier for people to transition to long-term investing once they have built up a cash buffer. Given between 40-50% of AJ Bell ISA assets are invested in the UK anyway, the chancellor should focus on making investing easy and let this existing ‘home bias’ boost UK capital markets naturally.
“Any move to mandate UK allocations within ISAs would be hugely complicated, hike costs for investors and deliver no obvious benefit to anyone. This government was right to kill off the previous administration’s UK ISA proposal and it should disregard any thought of bringing it back to life in a different guise.
“If the government is determined to add a pro-UK element to its ISA reform agenda, it should look at stamp duty – a tax that explicitly disadvantages UK retail investments versus their international counterparts.”
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 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.”
Rachel Vahey, head of public policy at AJ Bell:
“Reeves has, up to now, doggedly pledged to stick to her manifesto promises and not increase national insurance, income tax or VAT for working people. But as rumours abound that the Office for Budget Responsibility (OBR) is about to lower its productivity forecasts even further, Reeves’ hand may now be forced and she might have to do the previously unthinkable and raise income tax.
“Reports suggest that the chancellor is considering an increase in income tax by 1p across the board. For someone earning £35,000 a year, roughly the average income of a UK adult, an extra 1p on income tax would see their annual bill rise from £4,486 to £4,710 – an increase well in excess of £200.
“If this were to happen, there would be an extra incentive for those affected to contribute to a pension, as the tax relief available will increase by one percentage point. For a basic rate taxpayer, this would mean getting £100 in a pension would only cost £79, with £21 added through tax relief, compared to £80 today.
“Another option put forward is 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. Balancing the tax rise with a national insurance cut would mean employee pay after deductions remains the same, allowing government to claim it has upheld its manifesto pledge. Tilting the tax base toward income tax, rather than national insurance, could be seen as a way to package a tax rise aimed at those with the means to contribute more, while protecting pay packets for ordinary workers. Although the self-employed may well have something to say about that.
“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.”
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.
“Though this measure is unlikely to bring in the big numbers that other changes to NI would, taxing some doctors, accountants and venture capital funds would place the burden on predominantly higher earners, or those with the ‘broadest shoulders’, as the chancellor has suggested during various media rounds. Rachel Reeves has been warned that this risks alienating another tranche of doctors at a time the government is fighting to bring down NHS waiting lists, and also could have a knock-on to the amount of capital available to invest in UK start-ups and scale-ups – innovative businesses that are vital for economic growth.
“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.”
Rachel Vahey, head of public policy at AJ Bell:
“Thousands of employers currently use pensions salary sacrifice as a way of efficiently paying pension contributions but cutting down on both employer and employee national insurance costs.
“Because of these tax and NI advantages, pension salary sacrifice has frequently come under scrutiny, as the government searches for opportunities to reduce reliefs and boost revenue.
“But any changes are likely to go down very badly with 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.”
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.