Budget U-Turn Leaves Treasury Scrambling for Alternatives
In a dramatic policy reversal, Chancellor Rachel Reeves has reportedly abandoned plans to increase income tax by 2p in the upcoming Autumn Budget. The decision represents a significant U-turn that spares the government from breaking its manifesto commitment not to raise taxes on working people.
The original proposal would have seen income tax rise by 2p while cutting national insurance by the same amount for lower earners. However, with just two weeks remaining until Budget day, the Treasury now faces renewed pressure to identify alternative revenue sources after previous attempts to scrap winter fuel payments and reform welfare failed to deliver sufficient funds.
Stealth Tax Measures Take Centre Stage
With the direct tax increase off the table, attention turns to less visible methods of raising revenue. Extending the freeze on income tax thresholds emerges as the most likely option, having already proven to be an effective revenue generator for the Treasury.
Since the freeze began, fiscal drag has pulled an additional 6 million people into paying income tax and pushed 3.36 million more into higher or additional rate tax brackets. Maintaining this freeze for another two years could generate between £8 billion and £10 billion annually, according to Office for Budget Responsibility forecasts.
Financial analysis from Hargreaves Lansdown reveals the real-world impact: someone earning £60,000 could pay an extra £1,529 by the 2030 financial year if thresholds remain frozen. Crossing into higher tax brackets doesn't just affect income tax—it also exposes earners to increased dividend and capital gains tax rates.
Alternative Revenue Options Under Consideration
The Treasury is examining several other measures to fill the multi-billion-pound fiscal gap. Lowering income tax thresholds represents another possibility, though reducing the £12,570 personal allowance appears unlikely due to the disproportionate impact on lower earners and pensioners.
Instead, higher earners seem likely to bear the brunt, with potential reductions to the £50,270 higher rate threshold and £125,140 additional rate threshold. This would drag more people into higher tax brackets without technically raising tax rates.
A mansion tax has also gained traction in recent weeks, with proposals to create new council tax bands or increase rates for the most expensive properties. The Institute for Public Policy Research recommends doubling band H taxes and implementing 50% increases for bands F and G, while the Institute for Fiscal Studies suggests doubling taxes on bands G and H.
However, Sarah Coles of Hargreaves Lansdown warns that "this approach would mean revaluing the priciest properties in the UK, which would come at a cost."
Protecting Your Finances from Tax Changes
With multiple tax adjustments potentially incoming, financial experts emphasise the importance of utilising tax-efficient options. Cash ISAs remain a popular choice with their £20,000 annual tax-free allowance, though rumours suggest this could be halved to £10,000 to encourage spending rather than saving.
Stocks and shares ISAs are expected to remain unaffected by any allowance reduction and offer protection against potential dividend tax increases. Current rates stand at 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate taxpayers.
Pension contributions through salary sacrifice can help bring earners back below important thresholds, including the £100,000 level where families risk losing free childcare hours. However, the Treasury may cap tax-efficient pension sacrifices at just £2,000 per employee annually.
Married couples and civil partners have additional options, including transferring unused personal allowance between partners. Those earning below the £12,570 threshold can gift £1,260 of their allowance to a basic rate taxpayer partner, potentially saving £252 annually.
As Charlotte Kennedy, chartered financial planner at Rathbones, notes: "The government still has a multi-billion-pound fiscal black hole to plug, and the reported move could put other unsavoury tax changes back on the table." With the Budget announcement imminent, understanding these potential changes becomes increasingly crucial for financial planning.
