Rachel Reeves’s Spring Statement Overview
Rachel Reeves is set to deliver her Spring Statement on Wednesday, March 26, offering Members of Parliament (MPs) an insightful update on the country’s financial outlook for the upcoming year. In the lead-up to last year’s Budget, the Labour Party pledged to hold one “major fiscal event” annually, indicating that a multitude of policy announcements—ranging from tax reforms to spending adjustments—were not anticipated for March’s gathering. However, the evolving economic landscape has led experts to believe that the Chancellor may need to implement some changes to adhere to the Government’s self-imposed fiscal regulations.
‘Stealth Tax’ Extension
Under the previous administration, the personal allowance—the threshold at which individuals begin to pay tax—was frozen at £12,570. Additionally, higher and additional rate tax thresholds were also frozen, with the additional rate threshold being lowered in 2023 from £150,000 to £125,140. These thresholds are set to remain unchanged until 2028, which means that as wages increase over time, more individuals will find themselves subject to taxation or will pay higher taxes than they would have otherwise. In October, Reeves dismissed the idea of extending this threshold freeze beyond 2028, yet financial analysts now speculate she may need to reconsider this position.
Jason Hollands, managing editor at Bestinvest by Evelyn Partners, commented, “If there are any tax adjustments, keep an eye out for a possible extension of the freeze on personal allowances and thresholds past 2028.” The prolonged freeze on allowances, such as the annual tax-free personal allowance and the threshold for higher rate tax, acts as a stealth tax that gradually pulls millions into higher tax brackets as their wages rise. The Institute for Fiscal Studies (IFS) noted in a recent report, “A further threshold freeze would serve as a covert and arbitrary means of increasing revenue, but it is a tax increase that recent governments have demonstrated a willingness to implement, and thus may be considered credible. Other tax increases are certainly a possibility.” There are growing concerns that, should these thresholds remain frozen, state pensioners could soon find themselves needing to pay income tax even if they have no other sources of income.
Proposed ISA Changes
For several months, there have been whispers regarding potential modifications to Individual Savings Accounts (ISAs) in the forthcoming Spring Statement. Currently, savers are granted a £20,000 allowance each year for their ISAs, which can be allocated to stocks, shares, or cash savings, with the interest or gains generated being tax-free. Speculation suggests the cash component of ISAs might be reduced, with earlier rumors indicating it might even be eliminated entirely—though this scenario is now considered highly unlikely. The intent behind such a change would be to encourage a greater number of individuals to invest in stocks and shares, potentially driving economic growth in the UK.
Nimesh Shah, CEO of accountancy firm Blick Rothenberg, stated, “There are strong rumors that Rachel Reeves will lower the cash ISA limit to £4,000.” However, experts have indicated that any changes to the ISA limit may not take effect immediately for the 2025-26 tax year. Tom Selby, director of public policy at AJ Bell, remarked, “They could still lay the groundwork for ISA reform—such as announcing a review focused on simplification—which would inevitably raise the question of whether the cash ISA allowance should be reduced from £20,000.” Banks and building societies have voiced their concerns over these proposals, suggesting that many savers may lack the confidence to invest, which could adversely affect their financial wellbeing. Cash accounts are generally perceived as less risky than stocks and shares, making them more appealing to older individuals or those who might need immediate access to their funds.
Additionally, there has been speculation that Reeves might eliminate the application process for new lifetime ISAs. This consideration stems from the argument that the maximum property value eligible for purchase with the ISA—currently capped at £450,000—has remained static since 2017, making it increasingly unrealistic for individuals to buy homes at this price, particularly in urban areas.
Pension Tax Revisions
In the lead-up to last autumn’s Budget, numerous discussions revolved around potential alterations to the tax relief associated with pensions. Presently, individuals receive tax relief at their marginal rate when contributing to a pension; however, there were suggestions that this could be revised to a flat rate, which would disproportionately impact higher-rate taxpayers. Ultimately, the only significant modification to pension taxation during the Budget was the announcement that pensions would become liable for inheritance tax, a tax from which they previously enjoyed exemption.
Selby noted that although reforms in this area during the Spring Statement “are not beyond the realms of possibility,” he believes substantial changes—such as the introduction of a flat rate of tax relief or reductions in tax-free cash allowances—are unlikely. He explained, “Neither of these options would generate significant immediate revenue and could lead to considerable backlash from the public sector.” It is anticipated that there may be an update regarding the plans to bring pensions under the purview of inheritance tax. “There has been almost universal condemnation of the proposed approach, and the industry has presented alternative reforms to the government, including applying a flat tax on death and utilizing the income tax system,” he elaborated. Robert Salter, director at Blick Rothenberg, also mentioned the possibility of the Government contemplating a reduction in the 25 per cent tax-free pension lump sum. Currently, upon retirement, individuals can typically withdraw up to 25 per cent of their accumulated pension pot as a tax-free lump sum. However, any modification to this could spark significant controversy, as the allowance is well established and recognized as vital for encouraging savings for retirement, potentially undermining trust in the overall system.
Update on Pensions Review
One of Labour’s commitments during the election campaign was to conduct a thorough review of pensions, with an interim report focusing on investment published last year. The second part of this review was expected to examine adequacy, addressing aspects such as auto-enrollment into pensions and potential reforms. Currently, individuals contribute a minimum of 5 per cent of qualifying earnings into a pension under auto-enrollment, with their employer adding an additional 3 per cent. A review would likely assess whether these contributions should be increased.
Selby remarked, “Things have also gone very quiet on the second part of the pensions review, which was supposed to focus on adequacy.” He suggested that it is possible the Chancellor will seek to reignite that process, although increasing contributions—and thus costs for employers—may not align with the immediate goals of boosting economic growth.
Potential Spending Cuts
To align with its fiscal regulations—rules intended to signal to the markets that politicians are responsibly managing public finances—the Government may consider implementing cuts to public spending. “If Reeves prioritizes the fiscal rules and abandons her commitment to a single annual fiscal event, she faces a stark dichotomy between maintaining her promise to avoid further tax increases and her pledge of no return to austerity,” noted Bee Boileau, a research economist at the IFS. The IFS suggests that the Government could seek savings from non-public service budgets, including welfare expenditures. Labour politicians have consistently voiced concerns regarding the sustainability of current welfare spending.
In January, Work and Pensions Secretary Liz Kendall stated, “We must place the UK welfare budget on a more sustainable trajectory,” adding, “We cannot continue to accept these costs of failure—failure for individuals, for businesses, and for the economy as a whole.”
Widening the Scope of VAT
Another avenue Reeves might explore, according to Salter, is the potential application of VAT to private school fees for nurseries or university education, or even to private healthcare services. He explained that since universities and nurseries are typically operated as private charitable or for-profit entities, they are broadly comparable to private schools.
