Tax rises look inevitable as borrowing tops forecast ahead of Autumn Budget

Tax rises in November’s Autumn Budget appear likely as official borrowing figures show the deficit widening again. August net borrowing came in at £18 billion, up from £14.5 billion a year earlier and well ahead of market expectations of £12.8 billion, the Office for National Statistics said. The result adds pressure on Chancellor Rachel Reeves to balance the books and raises the prospect of broader tax changes that could touch pensions, savings, investments and housing.

Martin Beck, chief economist at WPI Strategy, said: 'The choice of which taxes to raise will be critical.' He warned that at the current pace borrowing in 2025-26 could overshoot the OBR’s full-year forecast by nearly £20 billion, pushing the deficit close to 5 per cent of GDP. Informed commentary around the Budget suggests the Government faces a steeper revenue task than previously anticipated, with productivity debates and welfare spending contributing to a tougher fiscal environment. The prospect of a larger-than-expected deficit has reinforced expectations that the Chancellor will outline revenue-raising steps in November, even as Labour signals a willingness to lean on tax reform as a central tool.

Pensions policy is a likely focal point. Official figures show pension tax relief cost the government about £80 billion in the tax year to April 2024, with nearly 70 per cent of that relief going to higher-rate taxpayers. Labour’s team, including Pensions Minister Torsten Bell, has signaled openness to reform that could reshape relief for pension savers. One option under discussion is a flat-rate relief structure—potentially a universal 30 per cent rate—that would lift lower earners while raising tax receipts from higher earners. Any such reform, if enacted, would probably take effect en route to next year’s pension cycle and would require careful transitional provisions to avoid abrupt disruption.

The notes suggest the Budget could also reconsider the amount of pension cash that can be drawn tax-free, currently 25 per cent of a pension pot up to a cap of £268,275. Bell and others have broached capping tax-free cash more tightly, arguing that pension savers should not be taxed twice on retirement savings. A cap at £40,000 has been floated in think-tank discussions, a move that would raise substantial revenue but provoke controversy among retirees and public-sector workers who rely on defined-benefit-style arrangements. Any change to tax-free cash would not be expected to take full effect until the next tax year, and would likely be subject to exemptions for certain public-sector schemes.

There is also potential for changes to capital gains tax (CGT) to align more closely with income tax rates. The government has signalled a willingness to adjust CGT in line with broader tax reforms, which could raise the tax bill for savers and investors who profit from shares or second homes. In recent years, the CGT regime has already seen increases, and Labour figures have suggested further alignment could be on the table. If CGT rates rise for basic-rate taxpayers—from 18 per cent to 20 per cent in a broader reform—higher-rate taxpayers could face steeper penalties, potentially up to 40 per cent or higher depending on the asset class and the holder’s marginal rate. A £3,000 annual tax-free allowance for capital gains would remain a relief against gains each year.

Investors should also plan around a possible tightening of pension-related investment rules and broader incentives for saving versus investing. The Budget framework under Reeves could maintain the overall annual ISA allowance at £20,000 for cash and stocks and shares combined, but proposals to pare back the cash allowance or to shift emphasis toward UK investments could surface in the final budget documents. Analysts note that a shift toward UK-focused equities—if announced—might reflect a broader policy stance but would require careful implementation to avoid unsettling markets.

The Institute of Labour’s policy discussions in recent months have hinted at restricting or rethinking how benefits and reliefs are treated in the estate and inheritance tax (IHT) space. Proposals have included tightening the rules around potentially exempt transfers (PETs) and possibly extending the seven-year exemption window or imposing a lifetime cap on gifts. While IHT remains a complex area with high political sensitivity, any tightening would aim to shore up revenue while preserving protections for family wealth transfers in many cases. The current nil-rate band and the residence nil-rate band combine to create a generous threshold for most estates, but advisers caution that changes could alter planning strategies for those who anticipate wealth transfers.

In the housing market, speculation has persisted about whether capital gains tax could be extended to primary residences. The prevailing view among many market observers is that any such proposal would be politically sensitive and likely to apply only to high-value homes at first. Critics argue that broad CGT on main residences could distort mobility and dampen housing turnover, while supporters say it would treat wealth realization more evenly. At this stage, there is no confirmation of a concrete plan to tax main-home gains, and Prime Minister Keir Starmer publicly ruled out a broad home CGT charge last year. Nevertheless, persistent chatter about potentialHome-related tax changes underscores the breadth of reform being contemplated as Reeves seeks to balance growth, welfare commitments and debt levels.

Against the backdrop of these potential shifts, financial advisers emphasize practical steps for households. With the savings landscape possibly facing tighter relief and lower allowances, individuals may want to maximize current allowances while they remain intact. This could include using the full annual cash and investments Isa allowances before any changes take effect, reviewing the personal savings allowance, and considering interspousal transfers to optimize tax positioning where appropriate. Bed-and-Isa strategies—selling investments outside an Isa and buying them back inside an Isa—may help shield future gains from tax, though investors should be mindful of Capital Gains Tax implications on disposals and the need to stay within annual allowances.

Tax planning will inevitably become more important if Reeves’ Budget introduces additional tax layers or reduces reliefs. Advisers stress the importance of timely professional guidance to navigate the evolving landscape and to avoid unintended tax consequences as policy proposals move from rumor to policy. The coming weeks will reveal more details as the Government unveils its full Autumn Budget, but the trajectory implied by recent data and public signaling points toward a period of notable fiscal tightening and broader tax adjustments that could touch pensions, savings, investments and homes alike.