What to expect from the Budget on 26 November

The government has announced its second Budget will take place on 26 November.

After a turbulent first year in power, it will be focused on stabilising an economy troubled by multiple setbacks and U-turns, putting the government under increasing pressure amid plummeting approval ratings.

The announcement fires the starting gun for the OBR (Office for Budget Responsibility) to complete its assessment of the UK’s financial health, given government plans for taxation and spending.

But the current reading of the economy doesn’t make for good news. Although growth received a slight boost last month, it remains relatively weak. Whereas long-term borrowing is rising fast.

After boxing itself into a corner at the election by promising not to raise rates of income tax, national insurance or VAT for ‘working people’, the government has few options to increase taxation to help bolster public finances. Speculation will be rife in the lead-up to the Budget over what measures it will resort to.

What could the 2025 Budget bring?

ISA reform

The government wants to encourage a retail investment culture in the UK and get more people investing for the long term rather than stashing their hard-earned savings in cash. Expect an update at the Budget on this plan.

Combining Cash ISAs and Stocks and shares ISAs into a single main ISA product would be the obvious starting point.

The current structure, which requires people to choose between a cash product or an investing product, is illogical. The fact only 16% of ISA holders hold both a Cash ISA and a Stocks and shares ISA in conjunction suggests the current regime could be improved.

AJ Bell estimates at least £100 billion of money held in Cash ISAs could be put to work investing for the long term.

Tax-free cash and pension tax relief

Every Budget is preceded by feverish speculation about possible tax changes, including to pensions tax-free cash and tax relief.

At the last Budget, this reached a new level and clearly affected people’s choices, with many rushing to get their pensions tax-free cash or hiking contributions because they feared these benefits could be taken away.

This level of uncertainty causes untold damage to people’s confidence in retirement saving.

Rather than letting this speculation run wild again, chancellor Rachel Reeves should back those who do the right thing and save for retirement by committing to a ‘Pensions Tax Lock’ – a pledge not to change tax relief or tax-free cash, at least for the rest of this Parliament.

This would remove a significant area of instability for savers and demonstrate this government is truly on the side of hard-working Brits.

Applying National Insurance to retirement incomes

Given the pledges made by the prime minister and the chancellor not to hike National Insurance (NI) rates, income tax rates or VAT and protect the incomes of ‘working people’, options to raise significant amounts of cash are thin on the ground.

Reeves could technically argue that applying National Insurance to retirement incomes does not increase taxes on working people, although it is hard to imagine she would go down a road that hits pensioners and would leave her open to accusations of breaking her NI promise.

Inheritance tax

The government has already announced inheritance tax (IHT) raids on farmers and pensions, so another attack at the Budget would represent an unwelcome hat-trick for anyone prioritising passing wealth onto their loved ones when they die.

The fiscal situation the chancellor finds herself in is precarious to say the least, with some estimates suggesting she needs to find £50 billion to get the nation’s finances back in line with her ‘iron clad’ fiscal rules.

Having ruled out changes to employee income tax, National Insurance and VAT, IHT is viewed as one of the few revenue-raising levers available that wouldn’t undermine economic growth or spark a backlash from public sector workers.

If Reeves wants to target inheritances again, the simplest way to do this would be to either reduce IHT thresholds or extend the ‘seven-year rule’ that applies to lifetime gifts.

Given the freezing of IHT thresholds will naturally raise more cash for the Exchequer over time through fiscal drag anyway, a shift in gifting rules might be a viewed as a politically more palatable option. But IHT remains one of the most hated taxes in Britain, so any move in this area will inevitably come at some political cost.

Capital gains tax

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 rates has been widely touted and may lead the OBR to forecast extra money 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 assets 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 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.

Frozen thresholds

Given frozen income tax bands now seem the norm, the public might well have forgotten what it’s like for these to rise in line with inflation.

Currently, tax thresholds are frozen until 2028, but Reeves could choose to extend the freeze to make her sums add up.

The chancellor might be able to claim this doesn’t break Labour’s election pledge not to raise income tax, were it not for the fact that at the 2024 Budget Reeves declared she wouldn’t freeze personal income tax and National Insurance thresholds, because she believed it would hurt working people.

Wealth tax

As things have looked increasingly tight on the fiscal side of things, partly a result of Labour U-turns on winter fuel allowance and welfare spending, the idea of a wealth tax has reared its head.

More than 30 sitting MPs have now signed a motion calling for a 2% wealth tax on those with assets above £10 million, many of them on the Labour benches.

Such a policy targets a small group of 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.

Questions of fairness also arise. Wealth that’s been accumulated may have already been subjected to income tax, capital gains tax, inheritance tax, or a combination of all three, so adding a wealth tax creates a state of double taxation.

Meanwhile, some couples will have their financial affairs arranged so the lion’s share of the wealth sits in the name of one individual, even though it supports both. 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 likely affect a small group of people, a wealth tax would likely be a controversial measure, not least because those caught up by it probably wield a disproportionate amount of influence as well as money.

‘Mansion tax’ or other high-value property tax

There is speculation regarding an annual property tax for properties over £500,000, which would ultimately replace stamp duty.

In the case of a family inheriting a property, that would presumably not exempt them from any inheritance tax that might be due. However, it seems likely they would only pay the annual property tax if they continued to own the property, rather than simply selling it and distributing the cash amongst the beneficiaries.

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 are highly emotive and likely to elicit a strong reaction amongst voters if they are seen to be on the up.

A ‘mansion tax’, for instance, could be unpopular even if it is set at a high enough level to preclude most taxpayers from paying it.

Ever since capital gains tax was introduced, gains on the home in which you live been exempt. The tax-free nature of your primary residence is deeply embedded in the psyche of homeowners.

A mansion tax set at high level would naturally cause people 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.

It would also be an impediment to mobility in the housing market, as those with properties which might fall foul of the tax would be inclined to sit on them for longer, leaving a log jam in the housing ladder below them.

Bank tax

Shares in UK banks including Lloyds and NatWest have taken a hit in recent weeks as rumours have surfaced suggesting the government may look to the sector to bolster tax revenues, fuelled by proposals from think-tank IPPR.

The issue is whether new taxes on banks will end up stifling the very growth the government is keen to foster, by crimping lending to businesses and households alike.

Shareholders may not want to see any such raid either, as it could threaten the scale of dividends and share buybacks they’re currently enjoying from banks.

The wider public may see it differently, given how HSBC, Barclays, NatWest and Lloyds are expected to earn some £44 billion between them worldwide in 2025, their third-best year ever, after 2023 and 2024.