During a tumultuous first year in power, the Government has faced a combination of sluggish growth and policy backtracks. Could taxpayers be hit with the bill?
With Labour facing a £5 billion black hole in public finances, there’s no denying the Government will need to make some difficult decisions in 2025 if it has any hope of getting back on track.
In fact, Cabinet Minister Pat McFadden has already confirmed that there will be “financial consequences” to the scrapping of certain planned welfare cuts.
Most notably, Chancellor Rachel Reeves will need to bring in extra cash to fund measures such as the partial U-turn on changes to Winter Fuel Payments.
And with growth proving sluggish – the economy actually shrank in the two most recent months we have data for – tax hikes seem like the most obvious route.
What changes could be on the horizon?
The Government is in a tricky position: it wants to ramp up revenues but famously pledged in its election manifesto that it "would not raise taxes on working people", as the screengrab below shows.
Alarmingly, however, there are already suggestions that Reeves may need to go back on this pledge, which would be yet another embarrassment for the party.
So, what are her options?
1. Tax raids by stealth
At present, rumours are circulating that the chancellor could be planning to extend the freeze on Income Tax thresholds, which is officially set to end in 2028.
Under current legislation, the Personal Allowance (the amount at which you start paying tax) has been held at £12,570 for Basic Rate taxpayers since 2021.
The Higher Rate kicks in on income above £50,271, and the Additional Rate at £125,140.
Often referred to as a “stealth tax”, an extended Income Tax freeze could quietly raise billions for the public purse by letting wage inflation push more Brits into higher tax brackets.
According to reports in The Times, Reeves could bring in an extra £9.2 billion into the public coffers if she were to extend the freeze until 2030.
Likewise, this move would also drag another one million Brits into higher bands.
2. Pensions tax relief
At loveMONEY, we are passionate about helping our readers save for their twilight years, which is why we are keen to see what the Government has in store for pensions this year.
At present, pension contributions benefit from generous tax relief – 20% for Basic Rate taxpayers and up to 45% for higher earners.
According to reports, however, this perk could also come under fire in the Budget, with speculation of a 30% flat rate for all tax brackets.
As the Times reports, this move would bring in approximately £3 billion per year.
Likewise, it’s rumoured Reeves could be plotting to lower the tax-free lump sum that savers can withdraw at the age of 55 – rising to 57 in 2028.
Under current rules, this allowance stands at £268,275.
3. Inheritance Tax
Inheritance Tax (IHT) has long been one of Britain’s most hated levies – and the Government knows it.
For example, Labour’s recent plans to bring private pensions into the £325,000 IHT allowance have provoked fury from many savers, as these funds had previously been exempt from the tax.
However, that might not stop the chancellor from looking for more ways to raise cash. One option? Tightening the rules on lifetime gifts.
Right now, you can give away money or assets and avoid IHT entirely – as long as you survive seven years after making the gift.
Tapered relief kicks in after three years, reducing the amount of tax due.
For instance, if you die within three to four years, IHT is charged at 32%.
Reeves could make tapered relief less generous or extend the seven-year window, meaning gifts take longer to escape IHT.
4. Capital Gains Tax (CGT)
As most loveMONEY readers know, you pay CGT when you sell an asset that has risen in value.
At present, Higher Rate taxpayers are charged 24% on residential properties and other valuables.
If you’re in the Basic Rate band, you’ll pay 18% on property and other goods.
However, there have long been calls to hike rates – and this may be on the radar for the chancellor later this year.
5. A new Wealth Tax?
The clamour for a so-called wealth tax is growing louder amid Labour’s left wing.
Under this principle, the super-rich, such as those with assets worth over £10 million, would face an additional levy – the idea is to reduce economic inequality and raise extra public funds.
Supporters argue it would be a fairer alternative to benefit cuts and could raise billions.
With this policy being a potential vote winner, Keir Starmer refused to rule it out during last week’s Prime Minister’s Questions.
6. Corporation Tax
So, what’s in store for businesses?
If rumours prove correct, the chancellor might also look to big industries to plug the fiscal gap.
This would most likely come in the form of Corporation Tax – a charge that limited companies pay on their profits.
At present, this stands at 25% for companies with profits over £250,000 and 19% on profits below £50,000. Those with earnings between these two figures receive graduated relief.
If Reeves were to increase the tax by just 1%, Investor’s Chronicle reports she could raise approximately £4 billion by 2029/30.
Cash ISAs: savers in the clear (for now)
While speculation had been rife that the Cash ISA allowance could be on the chopping block this year, it seems we’ve been granted a temporary reprieve.
According to reports last week, the Government has now shelved these plans.
Until recently, the chancellor was expected to slash the Cash ISA allowance from £20,000 to £4,000, while leaving the total annual ISA allowance untouched.
You can read the full loveMONEY comment in this article.
How you can fight back
Although tax changes can have a major impact on your financial life, they often take a while to filter through.
ISAs: while the Cash ISA allowance hasn’t yet changed, savers shouldn’t rest too easily as future tax grabs could be on the horizon. Try to make sure you maximise your tax-free perks while you still can.
Make pension contributions sooner: this is especially important if you're a Higher Rate taxpayer, as relief could soon become less generous.
Check your Capital Gains: if you’re sitting on profits from shares, crypto or property, consider if it makes sense to realise your profits before any potential rule changes.
Review estate plans: if you’re thinking about gifting money or assets, now might be the time to speak to a financial adviser.
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