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Five taxes Rachel Reeves could raise to plug the funding gap after her Budget

2025-10-04 02:06:03 By

"Public services now need to live within their means," Rachel Reeves declared to a group of business leaders during the CBI’s annual summit in November, reaffirming her position: "because I’m really clear, I’m not coming back with more borrowing or more taxes."

The Chancellor's remarks at that time were aimed at providing reassurance to the private sector following the backlash from her first Budget release in October. This maiden financial plan saw more than £40bn of charges imposed on businesses and the wealthy—a move that came as a shock despite Reeves' extensive efforts to court executives before the election, as reported by City AM.

Nevertheless, Reeves seemed to strike a different note weeks later when she refrained from reiterating those same declarations in the House of Commons later in November, instead stating that the government will "never have to repeat a Budget like that because we won’t ever have to clear up the mess of the previous government ever again."

Even Keir Starmer, when confronted by Conservative leader Kemi Badenoch, subtly shifted away from Reeves's stance, commenting that he was "not going to write the next five years of Budgets here at this despatch box".

Now facing the prospect of tightened fiscal constraints, both Reeves and Starmer are grappling with financial realities. There's a growing consensus among analysts that escalating gilt yields might obliterate the £9.9bn budget cushion that Reeves had earmarked following her Budget announcement.

The Treasury has affirmed that the "non-negotiable" and self-imposed fiscal rule to match government spending with tax receipts will remain in force. Should there be a breach, the Chancellor would have no choice but to source funds from alternative avenues, potentially indicating future tax increases.

With a strained relationship with many in the business community and restricted by a commitment not to raise taxes on "working people", the government's routes for generating revenue are somewhat narrow.

Prime Minister Keir Starmer, alongside Chancellor Rachel Reeves, has caused unease amongst some business leaders following a spate of tax raises announced at the recent Budget.

The promise made towards "working people" effectively eliminates any adjustment to approximately 46 percent of the government’s total tax income, which includes income tax, national insurance contributions for employees, and Value Added Tax (VAT). An additional vow not to elevate corporation tax beyond its existing rate of 25 percent maintains another eight percent of tax revenues at their current figures.

Taken together, Chancellor Reeves is precluded from altering 54 percent of the taxation base. However, Capital Economics analyst Ashley Webb outlines five potential tactics that Reeves could employ:.

Reeves has not dismissed the possibility of increasing levies such as capital gains tax, alcohol and tobacco duties, air passenger duties or vehicle excise duty.

Despite the government's pre-election dismissal of a "mansion tax", Webb suggests that another option could be to raise stamp duty and council tax on high-value and second homes.

However, these measures could have significant political repercussions. Prior to the Budget, rumours of a potential increase in the capital gains tax rate beyond 30 per cent sparked outrage among investors, who argued it would undermine the incentive to invest in the UK.

Further charges on second homes could also lead to accusations of Reeves targeting the affluent and aspirational. As Webb notes, adjustments to these taxes would only yield marginal additional revenue, as they collectively account for just 11 per cent of total tax receipts.

Another approach could involve modifying existing tax relief policies, such as ISAs and pensions. This could include reducing the amount of tax relief on pension contributions for high earners or abolishing the lifetime ISA.

However, this could raise concerns about the UK exacerbating its own investment stagnation. Encouraging investment into British companies has been a central objective of the City reform agenda, and discouraging investment from pension funds is likely to cause unease.

Webb suggests another approach the government might consider is prolonging the freeze on personal income tax thresholds beyond 2027/28 to 2029/30.

Reeves could look to widen the net of existing taxes, as evidenced by her recent policy to impose VAT on private school fees from the start of this year.

Expanding VAT to currently exempt products and services is a strategy that comes with historic caveats, Webb points out. "The ‘pasty tax’ debacle in 2012, when the then Chancellor George Osborne raised VAT on ‘hot takeaway food’ before quickly reversing it, suggests this could be difficult to do," he notes.

Webb also proposes that "Another option could be expanding the base on which national insurance tax is charged, for example by including investment income in addition to earned income."

To create new revenue streams, Webb identifies a significant opportunity for the Chancellor to save funds by halting interest payments on the £710bn of central bank reserves held at the Bank of England by commercial banks.

Although Reeves has indicated no intention to pursue this course, should interest payments linked to the Bank Rate cease on all reserves, Webb cites Capital Economics’ estimation of up to £34bn a year in potential savings for the government.

However, any potential boost could be curtailed by the expectation of a rate loosening cycle this year. If the base rate is cut to 3.5 per cent next year and the Bank of England continues to reduce the amount of reserves by selling its gilt holdings as part of a programme of quantitative tightening, perhaps to around £500-550bn by the end of 2026, the potential tax-take may be reduced to around £20bn a year, Webb says.

"Moreover, to maintain its ability to use Bank Rate as a monetary policy tool, the Bank of England would probably introduce tiered reserve remuneration rather than paying no interest at all, which would further reduce the potential tax revenue," he adds. "Even so, this would still be a chunky source of revenue for the government. As this would effectively be a tax on banks, though, at the margin it may weigh on the supply of credit."

Critics of the government say it has already broken a manifesto pledge after hiking national insurance contributions for employers, despite saying it would not change the levy in its manifesto. However, breaking its pledge not to change income tax, VAT or national insurance contributions from employees would present entirely new challenges politically for the government.

Even so, small tweaks to these charges could raise big sums. A one percentage point rise in each would raise £9bn, £7.3bn and £4.7bn respectively by 2026/27, according to Capital Economics’s calculations.

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City analysts downgrade luxury stocks as impact of Trump tariffs filter through

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Bank of England's Carolyn Wilkins highlights market discipline amid UK bond turmoil

The recent upheaval in the UK's bond market is a clear indication that the "dragons of market discipline are alive and well," according to a statement made today by Carolyn Wilkins, an external member of the Bank of England's financial policy committee (FPC). Speaking at Fitch Ratings, she acknowledged the recent instability in the gilt market, as reported by City AM. "Recently we’ve seen orderly movements in global yields as one would expect given news that markets consider relevant to the global outlook." She further noted, "There have been spikes in yields in a number of individual countries in recent years, including the UK, that indicate the dragons of market discipline are alive and well," The UK government bonds experienced a significant sell-off, largely driven by the anticipation that US interest rates would remain high for a longer period due to persistent inflation. The yield on the 10-year gilt reached 4.93 per cent, its highest level since the financial crisis. Gilt yields are closely linked to movements in the US Treasury market. Although yields have almost entirely recovered following soft economic data, the FPC remains concerned about the high levels of public debt, both in the UK and globally. "The FPC that I sit on is of the view that global sovereign debt risks are material," Wilkins stated, adding that global public debt is likely to approach 100 per cent of GDP by the end of the decade. Concerns are intensifying among market participants about the sustainability of public debt externally, which could affect the internal cost of debt servicing for the UK government, as well as for households and businesses, an expert emphasized. In recent times, a slew of commentators have sounded the alarm on the rising debt in advanced economies. Significantly, the Congressional Budget Office in the United States highlighted an alarming trend on Friday, stating that US government debt is likely to exceed its post-World War II record, a projection that's yet to account for the impact of the tax cuts introduced by Donald Trump. "The fiscal situation is daunting, the debt trajectory is unsustainable," remarked Phillip Swagel, director of the CBO, after the office published its report.

Gambit Corporate Finance toast best ever year with deals worth £500m in 2024

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Natwest share price rockets to 10-year high as investors eye bumper 2025 growth

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Bank of England to cut rates five times in 2025, says Morgan Stanley

Morgan Stanley has forecast that the Bank of England will implement five interest rate cuts in 2025 to bolster a faltering economy. On Monday, the US investment bank revised its growth forecasts downward, attributing this to the prolonged effects of the Bank's monetary tightening and repercussions from the Budget, as reported by City AM. It now anticipates the UK economy to expand by just 0.9 per cent in 2025, a decrease from the previous projection of 1.3 per cent and significantly below the consensus among City economists. "While the peak impact of the Bank of England’s policy tightening is likely behind us, its drag on the economy still persists," Morgan Stanley analysts wrote. They also observed that the measures announced in the Budget have negatively affected business sentiment. The analysts highlighted a "limited hiring appetite" even before the increase in employment costs, with demand becoming "lacklustre to non-existent" post-Budget. Recent purchasing managers’ index (PMI) data indicates that companies have been shedding jobs at the quickest rate since the financial crisis, barring the pandemic period. "The mood music has deteriorated meaningfully since the summer," the analysts commented, suggesting that the Bank would focus more on the weakening economic activity than on persistent inflation signs. According to Morgan Stanley's predictions, the Bank Rate would end the year at 3.50 per cent, a reduction from the current 4.75 per cent. Goldman Sachs, another Wall Street heavyweight, also expects the Bank to aggressively cut rates, forecasting six reductions by mid-2026. These forecasts are considerably more dovish than market predictions, which suggest three or four rate cuts by mid-next year. Policymakers are set to convene again on 6 February, with a third rate cut expected to be endorsed.

Investors pile into gold as Trump's tariff turmoil continues

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Former Bank of England policymaker says 'hold' rates at 4.5 per cent in May

Former Bank of England rate-setter Jonathan Haskel has indicated that current high inflation levels warrant maintaining interest rates at 4.5 per cent in May. Investors and analysts, anticipating a cut in interest rates next month to address concerns over low growth, are pricing in up to three additional reductions by year's end, as reported by City AM. However, Haskel, who served on the Bank's Monetary Policy Committee (MPC) until August of the previous year, argued for a "wait and see" stance despite potential deflationary impacts from President Trump's tariffs. In conversations with City AM, Haskel remarked: "Core inflation in the UK, dominated by domestically generated service sector inflation, is above target-consistent levels," and stated, "Thus, and given the uncertainty around what the enduring tariff level will be, I would favour a 'wait and see' policy and so hold UK rates at the next meeting." February saw inflation reach 2.8 per cent, spurred by a five per cent surge in services prices, well above the Bank of England's consumer price inflation (CPI) aim of two per cent. Haskel acknowledged that the comprehensive tariffs would put a damper on economic activity and inhibit growth as global markets adjust to open trading with the US. He also agreed with current MPC members Swati Dhingra and Megan Greene that such tariffs would exert a "deflationary for the UK economy" effect on the UK economy. According to Haskel, the influx of cheap goods from countries like China, which is subject to tariffs exceeding 100%, would likely drive prices down. Nevertheless, he maintained his stance. These comments offer a glimpse into the thought process of the more hawkish MPC members, who are growing increasingly concerned about persistent inflation. Clare Lombardelli, a current MPC member, expressed uncertainty about the impact of Trump's tariffs on inflation, citing the potential for retaliatory measures from other countries. Haskel's views diverge from those of former deputy Bank governor Charlie Bean, who advocated for a rate cut of up to 50 basis points. David Blanchflower, a former rate-setter, even suggested convening an emergency meeting before May 8. Kallum Pickering of Peel Hunt, who typically takes a hawkish stance on monetary policy, argued that the Bank has an "easy" decision to cut interest rates, as high inflation is no longer a concern due to tariffs. "We can worry a lot less about inflation, and therefore we can start easing a little bit faster," he told City AM. "Growth is likely to be weaker, so rates need to come down." Pickering suggested that Andrew Bailey should advise the Prime Minister to refrain from imposing reciprocal tariffs, thereby avoiding a near-term inflation shock. He also stated that predictions of inflation potentially reaching as high as 3.75 per cent were not "irrelevant". "It's not even worth paying attention to economic data that is telling you about the economy before the US dramatically escalated tariffs. It's just, it's redundant." Pickering further suggested that the elevated gilt yields, which are increasing borrowing costs, were a consequence of fears surrounding low growth and these changes provided further justification for the Bank to reduce interest rates. "In a strange way, if the Bank of England were actually to go a little bit quicker with rate cuts and support growth expectations, it would probably have the effect of reducing bond yields in the long run because markets would worry less about recession risk." Central banks around the world are rapidly responding to the impacts of a full-blown trade war. Policymakers in India and New Zealand cut interest rates on Wednesday. Reserve Bank of India Governor Sanjay Malhotra said "concerns on trade frictions are coming true." The US Federal Reserve has come under pressure from JP Morgan executive Bob Michele – and the US president himself – to cut interest rates. Federal Reserve Bank of Minneapolis President Neel Kashkari said high inflation expectations in the US would delay interest rate cuts while some analysts believe that markets may have overestimated the number of cuts due to be made this year. "The Fed is being held back from providing additional policy rate cuts because there is limited evidence that the economy needs immediate additional support," Seema Shah, chief global strategist at Principal Asset Management, told City AM. "In order to cut rates, the Fed needs to believe that softer growth will exert downward pressure on inflation in the medium term and inflation expectations must remain anchored."

West Midlands Lloyds and Halifax branches to close

A host of Lloyds and Halifax branches across Birmingham and the West Midlands have been tabled for closure over the coming months. The group is among 136 which the banking group has confirmed will be shut down. The first to close will be Lloyds and Halifax branches in High Street, Bromsgrove, at the end of May. They will be followed by Halifax, in Erdington's High Street in September, and Lloyds in Vicar Street, Kidderminster, just a few weeks later. Lloyds branches in Foleshill Road, Coventry, and High Street, Shipston-on-Stour, will both close in the first half of November and finally Halifax in Bearwood Road, Smethwick, will cease trading in March next year. Email newsletters BusinessLive is your home for business news from across the West Midlands including Birmingham, the Black Country, Solihull, Coventry and Staffordshire. Click through here to sign up for our email newsletter and also view the broad range of other bulletins we offer including weekly sector-specific updates. We will also send out 'Breaking News' emails for any stories which must be seen right away. LinkedIn For all the latest stories, views and polls, follow our BusinessLive West Midlands LinkedIn page here. Across the wider region there are branches in Staffordshire, Shropshire and the East Midlands also earmarked for closure. In total, 61 Lloyds, 61 Halifax and 14 Bank of Scotland branches will shut their doors for good between May and March 2026. The closures come weeks after Lloyds Banking Group said it would allow customers of Lloyds, Halifax and Bank of Scotland to use stores across any of its brands for in-person banking. The group has blamed the move on customers shifting away from banking in person to using mobile services but stressed it would offer affected workers roles elsewhere in the company. A statement said: "Over 20 million customers are using our apps for on-demand access to their money and customers have more choice and flexibility than ever for their day-to-day banking. "Alongside our apps, customers can also use telephone banking, visit a community banker or use any Halifax, Lloyds or Bank of Scotland branch, giving access to many more branches. "Customers can also do their everyday banking at over 11,000 branches of the Post Office or in a banking hub." The announcement means that more than 1,700 bank branches have shut or announced their intention to close since February 2022 when a voluntary agreement saw the major banking groups commit to assessing the impact of every closure. This has included both Lloyds and Halifax branches in Birmingham city centre and elsewhere across the region. It works out at an average of around 50 closures announced per month, with around 289 branches expected to shut this year.

Nikhil Rathi secures another five-year term as FCA chief amidst UK regulatory overhaul

Nikhil Rathi has been reappointed as the chief executive of the Financial Conduct Authority (FCA) for a further five years, tasked with the government's new mandate to cut back on unnecessary and repetitive regulation, as confirmed by the Chancellor. Rathi, who previously served as a Treasury official and the CEO of the London Stock Exchange, will continue his leadership at the FCA, the UK's principal financial regulator, as reported by City AM. Should he complete this term, Rathi's tenure at the helm of the FCA will reach a full decade. The Chancellor has chosen to maintain stability in the role, highlighting that Rathi's contributions have been "crucial" to the government's ambitious regulatory reform efforts aimed at streamlining the UK's regulatory framework to eliminate perceived impediments to economic expansion. On Christmas Eve, Rachel Reeves and Keir Starmer issued a directive to the heads of the UK's ten leading regulatory bodies, urging them to "tear down the regulatory barriers" they believe are constraining economic progress. This initiative to orientate the UK's regulatory bodies towards promoting growth has led to the departure or removal of several regulatory leaders, including those at the Competition and Markets Authority and the Solicitors Regulation Authority. The campaign has also triggered a significant reshuffle within the financial regulatory landscape, exemplified last month by the merger of the Payments Systems Regulator with the FCA, which aims to minimise redundant regulatory obstacles for businesses. Rathi will oversee the seamless integration of the merger. Upon hearing of his reappointment, he commented: "I am honoured to be reappointed by the Chancellor. The FCA does vital work to enable a fair and thriving financial services sector for the good of consumers and the economy." In the previous month, both the FCA and the Bank of England's Prudential Regulation Authority abandoned their initiatives to regulate firms' diversity, equity and inclusion (DEI) performance. Reflecting on these actions and other measures to reduce regulatory burden, Rathi stated: "I am proud of the reforms we have delivered to support growth, bolster operational effectiveness, set higher standards and to keep our markets clean and open." Reeves expressed her approval, saying: "Nikhil Rathi has been crucial in this government's efforts to reform regulation so it supports growth and boosts investment – I am delighted he will be continuing his leadership of the FCA."

Lloyds Banking Group to transform head office with £200m investment

Lloyds Banking Group is set to pour £200m into the revamp of the Scottish Widows headquarters, making it the financial giant's primary hub in Scotland. The renovation of the Port Hamilton building on Morrison Street, Edinburgh, executed in collaboration with Drum Property Group, pledges to bolster Lloyds' presence in the Scottish capital where approximately 10,000 staff are based, as reported by City AM. For nearly three decades, the building has served as the core office of Scottish Widows and is expected to retain its role post-upgrade in 2027, continuing to oversee pensions and investments. This eight-storey property, spanning 325,000 sq ft and known for its distinctive curved roof, stands out as an iconic edifice in Edinburgh’s financial district. According to Lloyds, this initiative is part of a broader commitment to cultivate a more sustainable and environmentally friendly office network across the UK, advancing towards their net zero ambitions. This endeavour aligns with the group's previous movements, including last year's full refurbishment of the Bristol office and relocation to Leeds’ most eco-efficient office space. However, earlier this month, City AM detailed Lloyds’ plans to shutter its Liverpool facility later this year, a decision affecting around 500 employees. This closure is seen as part of a wider strategy to maintain "fewer, better-equipped" offices and streamline operational costs. In a statement, Lloyds confirmed that no jobs have been cut as part of the closure plans. Instead, employees at the office will be asked to relocate to its Cawley House office in Chester. The bank added that 80 per cent of employees based in Speke are currently working remotely or will be doing so when the building closes. This news follows reports that senior staff at Lloyds Bank may face bonus cuts if they do not attend the office at least twice a week. Chira Barua, CEO of Scottish Widows, commented: "There’s a real buzz in the fintech scene in Scotland and we’re committed to staying right in the centre of it." He further stated: "We’ve made huge progress in connecting customers with their financial futures and we’re starting to see how powerful digital engagement and gamification will be in the future." He also noted the potential to make a significant difference for customers, saying: "There’s huge potential to help make a real difference for our customers’ lives and we’re right out in front building all the parts we need to innovate in a massive way." Sharon Doherty, chief people and places officer at Lloyds Banking Group, added: "We’re creating modern, inclusive, sustainable and fun workplaces where our people love to work." She also mentioned the improvements made to their offices across the UK, stating: "We’ve already made significant improvements to our offices across the UK, with more to come." "And our redesigned home in the centre of Edinburgh will help us connect, collaborate and spark the creativity to deliver great outcomes for our customers." Graeme Bone, group managing director at Drum Property Group, commented on the £200m redevelopment of Port Hamilton as "The £200m redevelopment of Port Hamilton presents an exceptional opportunity for Lloyds Banking Group to upgrade and enhance one of Edinburgh’s landmark buildings and deliver an exceptional working environment for Lloyds colleagues in an unrivalled location."