The tax changes Reeves could be pushed into making this spring ...Middle East

Rachel Reeves may have no choice but to sign off on further tax rises this spring despite committing to “one major fiscal event a year”, experts have warned, if she wants to avoid breaking her borrowing rules.

On March 26, the Office for Budget Responsibility (OBR) will release forecasts for the economy, which the Chancellor will share and respond to in her Spring Statement.

The watchdog is widely expected to slash its growth outlook and warn that Reeves is at risk of breaching her fiscal rules.

Since the October Budget, growth has undershot expectations, inflation has climbed to its highest level in 10 months at 3 per cent and a sharp rise in government bond yields has all but wiped-out Reeves’s £9.9bn headroom against her fiscal rules.

Neil Insull, a partner at audit, tax and business advisory firm Blick Rothenberg, said she may be “forced” to announce further tax rises in addition to expected spending cuts.

He said: “Lower growth projections in the OBR report will cause further jitters in the already nervous bond market and it will be no surprise if the Chancellor looks to raise tax revenues to meet her fiscal rules.”

But what tax changes could we see her make to boost growth? We spoke to experts to find out.

Despite Reeves confirming on 30 October that from the 2028/29 financial year, income tax thresholds will be uprated in line with inflation, experts told The i Paper the freeze could actually be extended.

Robert Salter, a director at Blick Rothenberg, said: “I would anticipate that the freeze on the income tax bands could easily be extended until April 2029.

“Clearly freezing the bands isn’t, at least directly, a tax rise, but it is already creating significant additional revenues for the government through fiscal drag and freezing the rates for another year would only increase this revenue raising.”

The frozen threshold for paying 20 per cent income tax is currently £12,570, for paying 40 per cent income tax it is £50,270, and the recently reduced additional rate threshold for paying 45 per cent tax is £125,140.

If they are kept frozen, it is predicted thousands of pensioners will be dragged into paying income tax for the first time.

Reducing the tax-free allowance on pensions

Previously, it was reported that government officials asked one of the UK’s top pension providers to assess the effects of cutting the tax-free lump sum to £100,000.

At the moment, most savers can take 25 per cent of their pension pot tax-free once they reach the age of 55, up to a maximum of £268,275.

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Reeves decided against this measure in the October Budget, but it could be on the cards this year.

Mr Salter said: “This would be quite controversial, as it is probably the ‘most well known’ bit about pensions for the average taxpayer.

“Plus, as a country, we clearly need to be saving more from a private pension perspective than we are presently doing and changing the rules about pensions could easily be said to undermine the faith that people have in the pensions system.”

Tom Selby, director of public policy at AJ Bell, said Reeves has three broad choices in the absence of a sharp rise in growth: loosen her fiscal rules, cut government spending, or raise taxes.

He said: “All of those come with significant political and practical challenges, particularly given businesses have already been clobbered and Labour pledged not to raise the rates of income tax, national insurance or VAT on ‘working people’ in its election manifesto.”

Instead, she could look to reform ISAs as an attempt to boost investment or economic growth.

It has already been rumoured the Chancellor is looking to scrap the cash ISA or lower the yearly tax free allowance from its current level of £20,000 to just £4,000.

City firms are said to have lobbied Reeves over this, with hopes more people would invest in stocks & shares ISAs and boost the economy.

But Mr Selby said: “Lowering the cash ISA allowance would introduce complexity, reduce choice and be unlikely to deliver the growth sugar-rush some of the policy’s advocates are claiming.

“Any reforms to ISAs need to be squarely focused on the long-term, with the aim of simplifying the product and encourage greater levels of long-term investing.

“A broader review of the ISA landscape announced at the spring statement, rather than a rushed reform to cash allowances, would be a sensible approach.

“Simplification alongside improvements to the help available to investors through ‘targeted support’ could create the foundation for an investing revolution in the UK, although clearly this isn’t going to happen overnight.”

Mr Salter added Reeves could cancel lifetime ISAs (LISAs)- which are mainly used to save for property deposits – altogether, adding: “This would be a relatively easy way of gaining some additional revenue whilst arguing it doesn’t impact most people.”

Widening the scope of national insurance contributions

At the last Budget, Reeves announced that employer national insurance contributions (NICs) will increase from 13.8 per cent to 15 per cent on 6 April.

Although proving unpopular, Mr Salter said this tax could also be imposed on benefits-in-kind.

These are a type of benefit you can offer an employee or director of a company in the UK on top of salary, for example, a company car or private health insurance.

He said: “It is basically currently chargeable only on cash earnings for employees and employee company share option/stock events.

“However, there is already a move to have benefits-in-kind reported via the payroll in all cases going forward. This would therefore fit ‘quite naturally’ with imposing employee NICs on such benefits.”

Given that Reeves has already imposed VAT on private school fees, it would be “logical” for her to look at widening the scope of VAT, Mr Salter said.

He suggested VAT could be imposed on areas such as private healthcare or the VAT on school fees could be widened to preschools or university education too.

“After all, universities and nurseries are typically privately run charities or for-profit institutions – so broadly akin to private schools.”

Relaxation of the penal changes to agricultural property relief

Rowan Morrow-McDade, tax director at Alexander & Co Chartered Accountants, thinks Reeves could relax the penal changes to agricultural property relief (APR), following widespread protests by farmers.

The Chancellor announced in the Budget that from April 2026, the availability of 100 per cent relief for agricultural and business property would be capped.

She announced that claims for business property relief (BPR) and agricultural property relief (APR) will be capped at £1m per taxpayer with tax charged at 20 per cent on the value in excess of the cap.

Farmers up and down the country have been protesting against this change since October, which may prompt Reeves to relax the changes, Mr Morrow-McDade said.

According to Capital Economics’ Fiscal Headroom Monitor, the rises in the Government’s borrowing costs since the Budget have whittled away Reeves’s headroom from £9.9bn to just under £3bn.

Taken together with the recent weakness in economic activity, there is now a significant chance that the OBR will judge the main fiscal rule has been missed, Ruth Gregory, deputy chief UK economist at Capital Economics, said.

She explained: “As a result, the Chancellor will probably face a nasty choice of breaking her fiscal rules or announcing more tax rises and/or spending restraint on 26 March.

“We suspect she would choose the latter, perhaps by reducing spending relative to existing plans in 2028/29 and 2029/30.

“That way she could avoid worsening the economy’s near-term prospects and politically unpalatable tax rises.

“And she may hope that by the time the spending squeeze arrived, things had improved such that she would not have to implement it.”

Tightening rules on personal companies

Tightening the rules on personal service companies – companies owned by an owner/director – could be an option, Mr Salter said.

These firms can decide whether to pay the owner and/or director a salary or dividends (or a combination of these) to retain funds in the business and pay them out via capital gains in due course (i.e. when the business is sold).

These options do generally provide the owner-director with a relative tax win compared to someone doing business, for example, directly as a self-employed individual.

Mr Salter said: “While this change would be controversial, there are other countries which do – at least to some degree – look through the personal service company when it comes to assessing the owner’s tax position.”

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