Autumn Budget 2025

Partner Sean Drury comments:

Rachel Reeves’s latest announcement means she will need to scrabble about with a whole range of relatively small but highly emotive tax policies to fill the fiscal black hole. We are drawing ever closer to the Autumn Budget and there doesn’t seem to be a clear ‘game plan’ for raising the money needed.

Policy Context: A Fiscal Gap Meets Political Constraints

The Government’s commitment not to increase the basic, higher or additional rates of income tax has removed one of the most straightforward sources of revenue. By backing out of changing the rate of income tax (or PAYE on workers) … her path is now limited to small tax changes which will seriously affect vocal constituencies, without raising significant revenues and upset a vocal constituency within her own party.

This combination of fiscal urgency and limited room for manoeuvre increases the likelihood of targeted, technical tax adjustments – changes that can be harder for the public to understand and more burdensome for businesses to administer.

The Potential Revenue Options and Their Trade-Offs

With income tax rate rises off the table, Reeves may turn to other mechanisms that broaden the tax base or remove longstanding anomalies. Sean outlines four main levers:

Freeze allowances for longer

Keeping allowances static during periods of wage inflation naturally pushes more people into the tax system. Although this process – known as fiscal drag – is already happening, extending freezes further could increase revenue gradually. However, as this is a long-term revenue raiser rather than the immediate financial injection she needs.

Reduce tax thresholds

Lowering the personal allowance or reducing the income levels at which the 40% and 45% tax bands apply would raise money more quickly.

But the impact would be politically sensitive: reducing the personal allowance to £10,000 and bringing the 40% threshold down to £40,000 could bring at least 4.1 million pensioners into paying income tax for the first time.

This group represents a powerful political constituency – raising questions about the Chancellor’s appetite for such a move.

Align areas where tax is currently reduced or absent

Areas such as dividends, LLP members and certain incentive arrangements, where income tax or NIC diverges from standard rules. Aligning these could raise meaningful revenue but would require careful design to avoid harming investment, entrepreneurship or flexible business structures.

Treat more gains as income

Reclassifying some capital gains – such as second-home gains or certain business asset disposals – as income could generate revenue while targeting wealthier taxpayers. Yet it risks distorting investment behaviour and further complicating the tax system.

Why It Matters for Businesses and Individuals

For individuals

More taxpayers could be drawn into higher bands, even without rate increases.

Pensioners and lower-income workers may face new liabilities, particularly if thresholds are cut.

Investors, landlords and business owners could see traditional reliefs eroded and capital gains reclassified.

For businesses

Administrative burdens may increase, especially if incentive schemes (such as share arrangements) are reformed.

LLPs and owner-managed businesses could face higher effective tax rates, affecting remuneration structures and investment capacity.

Uncertainty over tax direction adds complexity to planning recruitment, reward packages and long-term investment decisions.

More broadly, incremental “tinkering” risks undermining confidence in the stability and predictability of the UK tax system.

The Bigger Picture: Policy by Tinkering?

It is likely that we get minor tinkering, not dealing with the major issues on either spending or revenue raising and the can is kicked down the road for another fire-drill next year.

Sean highlights the strategic misstep of committing too early to tax positions:

What Rachel Reeves should have learned is not to box yourself into a corner with unnecessary pledges… And don’t announce a budget significant ahead of when you need to deliver it – speculation only harms sensible policy making.

What You Should Consider / Do Next

For businesses:

Stress-test reward structures (bonus plans, share schemes, LLP models) against the possibility of increased tax alignment.

Model the impact of lower thresholds on workforce remuneration, especially for key earners who could be pushed into higher bands.

Review investment and disposal plans, as capital gains could face income-tax treatment in future.

For individuals:

Evaluate your tax position early, particularly if you are close to threshold levels.

Seek advice on property or asset disposals, which could become less favourable.

Consider pension contributions or salary-sacrifice options to mitigate potential fiscal drag.

Would you like to know more?

If you’d like to discuss the above, please speak to your usual Blick Rothenberg contact or Sean using the form below.