The Fiscal Reality: Why Tax Hikes are the Default Position

The Government is faced with a fiscal conundrum often referred to as the “fiscal hole.”10 This shortfall—the difference between planned spending and projected revenue—is compounded by two major factors:

1. Debt Servicing Costs: The cost of servicing the UK’s high national debt has ballooned.11 The interest payments alone are forecast to be over £111 billion this year, a figure comparable to the entire education budget, putting continuous pressure on public finances.12
2. Downgraded Growth Forecasts: The Office for Budget Responsibility (OBR) is reported to have cut its productivity predictions.13 According to the Institute for Fiscal Studies (IFS), every small downgrade in growth forecasts can add billions to government borrowing over the medium term, widening the fiscal hole further.14

In her pre-Budget address, the Chancellor explicitly referred to the difficult hand she has been dealt, stating, “If we are to build the future of Britain together, we will all have to contribute to that effort.” For financial markets, this was taken as a clear signal that broad-based tax rises are no longer off the table.15

The Revenue Hunt: Targeting Income and Wealth

The core of the Budget’s measures is expected to focus on generating significant revenue. The rumours circulating in Westminster and the City fall into three main baskets:

1. Personal Taxation: The Battle of the Pledges

The Labour manifesto explicitly promised not to raise the headline rates of Income Tax, National Insurance (NICs), or VAT.16 However, the economic reality is challenging this commitment.

• Income Tax Rate Rises: There is growing speculation about a 1p or 2p rise in the basic rate of Income Tax.17 To soften the political blow and remain technically compliant with a commitment to protect “working people,” one proposal suggests offsetting this with an equivalent cut in employee National Insurance contributions (Source: The Guardian, November 2025).18 This move would effectively raise tax on non-working people with investment income (such as pensioners or landlords) without a NICs offset.19
• Threshold Freezes (The Stealth Tax): A less transparent, but highly effective, way to raise revenue is simply to keep Income Tax and NICs thresholds frozen for longer, a measure known as fiscal drag.20 As wages increase, more people are pulled into higher tax brackets or start paying tax for the first time.21 This “stealth tax” is often more politically palatable but financially punitive for middle earners.
• Targeting Higher Earners: Reports suggest the Treasury may attempt to define ‘working people’ as those earning up to approximately £45,000, leaving those earning above the basic rate threshold open to targeted tax hikes (Source: The Daily Mail, November 2025).22

2. Wealth and Asset Taxation: The ‘Broadest Shoulders’

Following the Chancellor’s rhetoric about those with the “broadest shoulders” paying their fair share, a flurry of targeted wealth measures is anticipated.23

• Inheritance Tax (IHT) Gifting Rules: IHT has been a perennial target.24 The current rule allows gifts to individuals to fall outside the estate after seven years.25 There are strong rumours that this seven-year period could be extended to ten years or that a lifetime cap on the total amount gifted IHT-free could be introduced.26
  • Proactive Step: For those planning to make substantial gifts, bringing the action forward before the Budget could lock in the current seven-year rule.
• Capital Gains Tax (CGT): While CGT rates were already raised in a previous fiscal event, further harmonisation with Income Tax rates remains a long-term goal for the Treasury. A further increase in the main CGT rates and/or a reduction in the CGT Annual Exempt Amount (currently £3,000 for the 2024/25 tax year) is a perennial option to raise revenue from asset sales.
• Exit Tax: A highly controversial rumour is the introduction of a 20% ‘exit tax’ on the assets of high-net-worth individuals who decide to leave the UK permanently to avoid future tax liabilities (Source: The Guardian, November 2025).27

3. Pension and Savings Reform: The Unpopular Squeeze

Pensions, with their substantial tax reliefs, are often seen as low-hanging fruit for a revenue-hungry Treasury.

• The 25% Tax-Free Lump Sum: Speculation continues that the ability to take 25% of a pension pot tax-free could be limited or scrapped entirely.28 While such a major, retrospective change is complex and highly unpopular, its frequent appearance in Budget speculation means it cannot be ignored.
  • Proactive Step: Rushing to take the tax-free cash should be avoided. HMRC has explicitly warned that such a withdrawal cannot be easily reversed if the rules are not ultimately changed.29
• Tax Relief Reduction: The most likely change is a reduction in the generosity of pension tax relief for those paying at the higher and additional rates. Moving to a flat rate of tax relief for all could be an administratively simpler way to generate billions in revenue.
• ISA Reform: There have been recent, albeit denied, rumours of a potential cut to the Cash ISA allowance.30 The Chancellor, however, has spoken positively about Stocks & Shares ISAs in the context of encouraging UK investment, suggesting a focus might be placed on steering money into long-term investments rather than outright cuts.31

Property, Landlords, and the Housing Market

The UK’s obsession with property means any Budget changes here will have a massive impact.

• Tackling Landlords: There is mounting pressure to address the perceived tax advantages of being a landlord.32 A significant change under review is the introduction of National Insurance Contributions (NICs) on rental income.33 This would substantially increase the operating costs for buy-to-let investors (Source: St. James’s Place, October 2025).
• SDLT/Council Tax Reform: To stimulate the housing market, a change to Stamp Duty Land Tax (SDLT)—perhaps allowing payments to be spread over several years—has been mooted.34 Longer-term, a complete overhaul of Council Tax to better reflect current property values, or the creation of new, higher bands for expensive properties, remains a policy option.35

💡 What You Should Be Doing Now: A Pre-Budget Checklist

The best defence against unpredictable tax changes is to maximise the allowances you know you have access to today.

1. Pension Annual Allowance: Ensure you are utilising your £60,000 Annual Allowance (or lower if the Tapered Annual Allowance applies to you). Contributions today will secure the current rate of tax relief, which may be reduced post-Budget.
2. ISA Allowance: Maximise your £20,000 ISA allowance for the current tax year. Money held within an ISA is protected from future Income Tax and Capital Gains Tax changes.37
3. Capital Gains Tax (CGT) Harvesting: Consider using your £3,000 Annual Exempt Amount (AEA) by selling assets that have appreciated in value. If the AEA is cut further in the Budget, you will have locked in a tax-free gain at today’s limit.
4. Gifting Review: If you planned to make a substantial gift using the current Potentially Exempt Transfer (PET) rules to start the seven-year IHT clock, discuss with your adviser whether accelerating this gift is prudent.
5. Business Profit Distribution: For partners in LLPs or partnerships facing potential new NICs on profits, review the timing of profit distributions with your accountant before the November 26th deadline.38