Rachel Reeves may face pressure to approve additional tax increases this coming spring, despite her commitment to having “one major fiscal event a year,” experts have cautioned. On March 26, the Office for Budget Responsibility (OBR) is set to unveil its forecasts for the economy, which the Chancellor will review and respond to in her Spring Statement. The OBR is widely anticipated to lower its growth projections and caution that Reeves may risk violating her fiscal rules.
Since the Budget in October, economic growth has not met expectations, inflation has surged to its highest level in ten months at 3%, and a significant increase in government bond yields has nearly eliminated Reeves’s £9.9 billion buffer against her fiscal targets. Neil Insull, a partner at the audit, tax, and business advisory firm Blick Rothenberg, noted that she may be “forced” to announce further tax hikes in addition to the anticipated cuts in spending. He remarked, “Lower growth projections in the OBR report will likely cause more jitters in the already anxious bond market, and it wouldn’t be surprising if the Chancellor seeks to raise tax revenues to comply with her fiscal mandates.”
But what tax alterations might she consider to stimulate growth? We consulted various experts to explore potential changes.
Extension of Income Tax Threshold Freeze
Despite Reeves confirming on October 30 that from the 2028/29 financial year, income tax thresholds would be adjusted in line with inflation, experts told The i Paper that the freeze might be prolonged. Robert Salter, a director at Blick Rothenberg, stated, “I would expect that the freeze on income tax bands could easily be extended until April 2029. While freezing the bands isn’t a direct tax increase, it is already generating significant additional revenue for the government through fiscal drag, and maintaining the rates for another year would only amplify this revenue.”
The current frozen threshold for paying 20% income tax stands at £12,570, for paying 40% income tax at £50,270, and the recently reduced additional rate threshold for paying 45% tax is £125,140. If these thresholds remain frozen, it is projected that thousands of pensioners could find themselves liable for income tax for the first time.
Reducing the Tax-Free Allowance on Pensions
There have been reports that government officials consulted with one of the UK’s leading pension providers to evaluate the ramifications of cutting the tax-free lump sum to £100,000. Currently, most savers can withdraw 25% of their pension pot tax-free once they reach the age of 55, with a maximum limit of £268,275. Though Reeves opted against this measure in the October Budget, it could resurface this year. Mr. Salter remarked, “This would be quite controversial, as it’s likely the ‘most recognized’ aspect of pensions for the average taxpayer. Moreover, the country clearly needs to enhance private pension savings, and altering pension rules could undermine public confidence in the pension system.”
ISA Reforms
Tom Selby, director of public policy at AJ Bell, indicated that Reeves has three primary options in light of a lackluster growth forecast: relax her fiscal rules, reduce government spending, or raise taxes. He elaborated, “Each option presents significant political and practical challenges, especially since businesses have already faced substantial burdens and Labour pledged not to increase income tax, national insurance, or VAT on ‘working people’ in its election manifesto.”
Alternatively, she could consider reforming Individual Savings Accounts (ISAs) as a means to encourage investment or stimulate economic growth. Rumors suggest that the Chancellor may contemplate abolishing the cash ISA or slashing the annual tax-free allowance from its current level of £20,000 to just £4,000. City firms are reportedly lobbying Reeves in hopes that more individuals would invest in stocks and shares ISAs, thereby invigorating the economy. However, Mr. Selby cautioned, “Reducing the cash ISA allowance would add complexity, limit choices, and is unlikely to produce the rapid growth some proponents claim.” He advocated for a comprehensive review of the ISA landscape announced during the spring statement, rather than hastily reforming cash allowances. “Simplification, alongside enhanced support for investors through targeted initiatives, could lay the groundwork for an investment revolution in the UK, though this will not happen overnight.”
Mr. Salter added that Reeves might consider eliminating Lifetime ISAs (LISAs), which are primarily used for saving towards property deposits, stating, “This would be a relatively straightforward way to generate additional revenue while maintaining the argument that it doesn’t affect most individuals.”
Widening the Scope of National Insurance Contributions
In her last Budget announcement, Reeves revealed that employer national insurance contributions (NICs) would escalate from 13.8% to 15% starting April 6. Although this move has faced backlash, Mr. Salter suggested that this tax could also be extended to cover benefits-in-kind. These are benefits offered to employees or directors beyond salary, such as company cars or private health insurance. He explained, “Currently, NICs are only charged on cash earnings for employees and certain stock events. However, there is a push to have benefits-in-kind reported through payroll in all cases, which would align naturally with imposing employee NICs on such benefits.”
Widening the Scope of VAT
Given that Reeves has already placed VAT on private school fees, it would be “logical” for her to consider expanding the VAT scope further, according to Mr. Salter. He proposed that VAT could potentially be applied to areas such as private healthcare or even expanded to include preschool or university fees. “After all, universities and nurseries typically operate as privately run charities or for-profit entities, similar to private schools,” he noted.
Relaxation of Changes to Agricultural Property Relief
Rowan Morrow-McDade, a tax director at Alexander & Co Chartered Accountants, believes Reeves could ease the stringent changes to agricultural property relief (APR) following protests from farmers. The Chancellor had announced in the Budget that starting April 2026, the 100% relief for agricultural and business property would be capped. She specified that claims for business property relief (BPR) and agricultural property relief (APR) would be limited to £1 million per taxpayer, with a 20% tax applied to any value exceeding this cap. The widespread discontent among farmers since October might motivate Reeves to reconsider these changes, according to Mr. Morrow-McDade.
Reduce Spending
According to the Fiscal Headroom Monitor by Capital Economics, the rising government borrowing costs since the Budget have diminished Reeves’s headroom from £9.9 billion to just under £3 billion. Coupled with recent economic activity downturns, there is now a substantial risk that the OBR will determine that the main fiscal rule has not been met. Ruth Gregory, deputy chief UK economist at Capital Economics, explained, “Consequently, the Chancellor will likely confront a difficult choice between violating her fiscal rules or announcing further tax increases and/or spending cuts on March 26. We suspect she may opt for the latter, perhaps by reducing spending in the years 2028/29 and 2029/30. This way, she could avoid exacerbating the economy’s immediate outlook and unpopular tax increases, hoping that by the time the spending cuts are enforced, the economic situation has improved enough to avoid their necessity.”
Tightening Rules on Personal Companies
Mr. Salter also suggested that tightening regulations on personal service companies—companies owned by an owner/director—could be another viable option. These firms can choose whether to compensate the owner and/or director through salary, dividends, or a combination of both, allowing them to retain funds within the business and eventually pay them out at a lower capital gains tax rate when the business is sold. “While such a change would be contentious, other countries do, to some extent, disregard the personal service company when evaluating the owner’s tax obligations,” Mr. Salter stated.
