Potential Tax Changes in the 2025 Budget: An Overview

LHP Accountants
Oct 3
5 min read

The UK government operates under fiscal rules that span the economic cycle, approximately five years. This approach doesn't mandate immediate tax increases or spending cuts to balance the budget.

However, financial experts anticipate that the government will announce tax hikes in November to address an expected budget deficit.

This article explores various potential tax-raising measures that might be introduced.

What we will explore:

Extended Income Tax Threshold Freeze

National Insurance on Rental Income

Pension Tax Relief Adjustments

Capital Gains Tax Modifications

Salary Sacrifice for Electric Vehicles

Customs Duty on Low-Value Consignments

Personal Tax Changes

Extended Income Tax Threshold Freeze

Currently, income tax thresholds and personal allowances are frozen, gradually pulling more people into paying taxes and pushing higher earners into increased tax brackets as their incomes grow. This freeze is scheduled to last until 2027/28 but extending it through 2030 could generate billions in revenue without technically raising tax rates. For many taxpayers, this change might not feel like a tax increase.

Property Tax Changes

The government might consider indirect taxes on wealth, which would be easier to implement than direct wealth taxes. Potential measures include introducing higher Council Tax bands, conducting property revaluations, or implementing additional taxes on second homes.

These changes would be administered by local authorities, providing political distance for central government. Another possibility involves modifying Capital Gains Tax (CGT) rules for private residences. Currently, gains from selling your primary residence are completely exempt. This exemption might be limited for properties exceeding certain values (between £500,000 and £1.5 million under consideration). Additionally, there's speculation about introducing a specific "mansion tax" on homes valued at £500,000 or more, which could replace or supplement Stamp Duty Land Tax.

National Insurance on Rental Income

The government is considering subjecting rental income from private landlords (individuals and partnerships) to National Insurance Contributions (NIC). The implementation details remain unclear, particularly regarding how this would interact with other income sources and corporate structures. With the upcoming Making Tax Digital for income tax returns (phasing in from 2026/27), collecting NIC on rental income would become administratively simpler for HMRC.

Pension Tax Relief Adjustments

With pension tax relief costing the government an estimated £45-50 billion annually, this area frequently faces speculation about potential reductions. The 2024 Budget already announced that residual pension funds and lump sum death benefits would become subject to Inheritance Tax (IHT) after April 6, 2027. Rather than reducing income tax relief (which could discourage pension savings), the government might implement a small levy on pension fund values. A 0.25% fund levy would be barely noticeable to most savers but could generate billions in revenue. This could be collected by pension fund managers with minimal taxpayer involvement or HMRC support.

NIC on Partnership Earnings

Currently, partners in general or Limited Liability partnerships pay Class 4 NIC as self-employed individuals, avoiding employer's NIC (currently 15%). A proposal has been made to subject partners' earnings to employer's NIC, but this would likely be controversial and affect many small business owners. A smaller change, such as equalising Class 4 NIC rates with Class 1 employee rates, might be more politically feasible.

NIC for Older Workers

Despite a manifesto commitment not to increase individual NIC rates, the government might consider introducing a special "older worker" NIC rate for those who continue working past state retirement age and earn above the upper earnings limit (£50,270). Currently, these workers pay no NIC, though their employers still do.

Capital Gains Tax Modifications

Research indicates that steep increases in CGT rates typically boost revenue in the year before implementation (as people sell assets to secure lower rates) but reduce revenue afterward (as people hold onto appreciating assets). Small, incremental increases in CGT rates could generate more long-term revenue without significantly deterring sales activity.

IHT Gift Relief Modifications

The government is considering changes to current IHT gift reliefs to reduce opportunities for tax-free lifetime gifts. Potential reforms include updating or consolidating the fixed level gift reliefs, modifying the seven-year rule (currently allowing tax-free gifts if the donor survives seven years), or adjusting the exemption for gifts made from surplus income. These changes would likely only affect gifts made after the Budget announcement to avoid retrospective taxation.

Fuel Duty Increases

Fuel duty rates haven't increased since 2011, with a 5p per litre reduction implemented in March 2022 that has been maintained since. If fuel prices remain stable and inflation decreases, the Chancellor might implement a small fuel duty increase.

"Sin" Taxes

With the government already reforming the remote gambling levy, increasing tax rates on gambling companies seems likely. Additionally, if inflation continues to fall, taxes on sugar, tobacco, and alcohol may well increase, possibly with specific exceptions to support pubs and restaurants.

Business Tax Changes

Bank Surcharge Increase

The current 3% bank surcharge on top of the 25% main corporation tax rate could be increased. Alternatively, technical changes might make interest on funds held by commercial banks at the Bank of England taxable, potentially generating up to £3.3 billion in revenue.

Business Rate Reforms

Ongoing reforms to business rates will likely continue, with businesses using large or high-value premises paying higher rates while smaller high street businesses retain some discounts. Further changes might increase rates for warehouses used by online businesses and gradually reduce discounts for smaller businesses.

Salary Sacrifice for Electric Vehicles

If salary sacrifice arrangements for pension contributions face restrictions, similar tax-efficient arrangements for electric vehicles (EVs) could also be targeted. This possibility seems more likely given the recent clampdown on Employee Car Ownership Schemes that circumvent benefit-in-kind rules for cars.

Customs Duty on Low-Value Consignments

Low-value goods imported into the UK (below £135) currently benefit from simplified customs reporting and duty-free status. Following the US suspension of its de minimis import exemption and similar EU considerations, the UK might reduce or eliminate this threshold to support domestic retailers competing with those in low-tax jurisdictions.

Landfill Tax Reform

The government has proposed modernising landfill tax to increase compliance and save £100 million annually. Current proposals include phasing out certain exemptions and eliminating the lower rate for inert waste by 2030. However, given concerns about increased costs for house builders and infrastructure projects, these reforms might be delayed or watered down.

VAT Registration Threshold

While rumours about changes to the £90,000 VAT registration threshold surface before every Budget, significant changes are unlikely. Increasing the threshold would lose revenue; while reducing it would increase costs and administration for small businesses. The UK's threshold is already higher than all EU member states, making a reduction logical but politically unpopular.

VAT E-Invoicing

The government may move toward requiring businesses to issue electronic VAT invoices and automatically copy tax authorities, like EU initiatives. This approach could improve record accuracy and reduce fraud and error.

If you have any further queries about the budget, then please don’t hesitate to contact us.

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