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As the UK anticipates the Spring Budget 2025, speculation is rife regarding potential changes to taxation and their broader implications.
Chancellor Rachel Reeves is expected to deliver her statement on 26 March 2025, against a backdrop of economic challenges and fiscal constraints.
While the Chancellor has stated that this is not a "tax-raising" mini-Budget, the prevailing economic conditions suggest otherwise.
It is likely taxes will increase, and the UK will see a return to the austerity that the Labour party so heavily criticised when the Conservatives introduced it after the global financial crisis.
What might we see?
1. Spending cuts over tax rises
Rather than introducing significant tax hikes, the government is expected to focus on spending cuts. This approach aims to balance public finances without breaking manifesto promises. Stricter eligibility criteria for benefits such as Universal Credit and Personal Independence Payment (PIP) are anticipated, aiming to save approximately £5 billion annually by the end of the decade.
2. Freeze on income tax and National Insurance thresholds
Existing measures like freezing income tax rates and thresholds are expected to be extended. This freeze could potentially last beyond 2028-29, helping to raise additional revenue without increasing tax rates directly. Whilst generally touted as ‘not raising tax rates’, it is publicly regarded that this causes stealth taxation by bringing more people into taxation and higher rates than previously as the effect of inflation on salaries is not met with increases in tax bands or allowances.
3. Adjustments to Inheritance Tax and ISA contribution limits
There is speculation about possible changes to Inheritance Tax thresholds and ISA contribution limits.
These adjustments are aimed at addressing fiscal challenges while encouraging savings and investment. It seems odd that Inheritance Tax thresholds would be the target as these have been frozen for over a decade and so have suffered fiscal drag in any case. But Labour supporters will see them as only benefiting the rich.
But be careful what you wish for. Housing market booms have increased the values of property all over the UK, and depending on how far the thresholds are reduced, then even modest home-owners and young buyers could ultimately be dragged into this penal tax.
Reducing ISA contribution limits could encourage other investment avenues, such as Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs), or indeed encourage additional pension saving where allowances permit.
It is not clear that this would have any significant economic impact or encourage people to spend rather than save for their retirement. It could result in additional taxation in some instances, but it the vast majority of cases will encourage using pensions which cost the Government money in basic rate and higher rate tax relief.
4. Employer National Insurance Contributions
From 6 April 2025, the rate of employer National Insurance Contributions (NICs) is set to increase by 1.2 percentage points, rising from 13.8% to 15%. This change is part of broader efforts to increase revenue without directly impacting individual taxpayers. This provision has been widely criticised as anti-business and heavily damaging to the economic outlook of business in the UK.
5. Capital Gains Tax adjustments
Capital Gains Tax (CGT) rates are due to increase in line with the proposals set out at the Autumn Budget. This adjustment is aimed at ensuring that higher earners contribute more to public finances, aligning with the government's fiscal discipline goals.
6. Support for businesses
Potential relief measures for businesses are being considered, including adjustments to the Employment Allowance and targeted support for sectors like agriculture and charities. These measures aim to mitigate the impact of increased NICs and support economic growth.
7. Stricter self-assessment penalties for late filing
There are suggestions that the Chancellor may tighten the rules regarding late filing of self-assessment returns. Over 1.1 million self-assessment taxpayers had not filed their 2023/24 tax returns by the filing deadline of 31 January 2025, with the consequence of immediate automatic late filing penalties of £100, and surcharges of 5% of the unpaid tax if it is paid late by more than 30 days.
New proposals suggest that taxpayers with an income of more than £20,000 could be hit with a penalty of 3% of the outstanding tax amount if they are late by 15 days, and people who are late by more than a month will face a penalty of 10 per cent on the outstanding amount.
Ms Reeves will also employ more third-party debt collectors and HMRC staff to help them collect more tax.
These somewhat cynical changes are also being criticised as a tax on small businesses and seem to be a punishment in respect of the symptom of a weak economy, rather than the solution to the issue itself - to focus on encouraging business growth and investment, to grow the UK economy, the backbone of which is small business.
Summary
The Spring Budget 2025 is poised to introduce significant changes aimed at balancing the UK's public finances amidst economic headwinds.
While spending cuts are expected to be the primary focus, adjustments to tax thresholds and contributions will play a crucial role in shaping the fiscal landscape.
Businesses and individuals alike should prepare for these changes and consider their potential impacts on financial planning and investment strategies. Whatever the interpretation, the economic outlook of most businesses and individuals appears to remain bleak.
The next step
Our breakdown of the main announcements will be available from Thursday 27 March. To receive our summary in your inbox, please sign up on this page.
