The tax hikes Rachel Reeves could impose to plug the benefits U-turn £3bn hole

Households are on alert for further potential tax hikes in autumn after Keir Starmer handed major concessions to rebels in a bid to salvage flagship legislation on health and disability benefits. 

On Friday, the government confirmed a U-turn on its cuts to disability benefits in order to avert a rebellion by more than 120 Labour backbenchers. 

The reversal leaves a £3billion hole in Chancellor Rachel Reeves’ financial plans, according to the Institute for Fiscal Studies. Meanwhile, the Resolution Foundation warned that tax rises may be needed for her to now meet her fiscal rules.

The initial benefit reforms would have saved the government £5.5billion by the end of the Parliament. The planned cut to personal independence payments eligibility was set to raise the bulk of this saving, £4.5billion. 

However, according to the IFS, the revised package of reforms will save only £2.5billion, so will cost the government £3billion relative to their previous plans.  

Under the change in tack, people who currently receive personal independence payments (PIP), or the health element of universal credit, will continue to do so. Instead, planned cuts will now only hit future claimants.

Liz Kendall, Secretary of State for Work and Pensions, said: ‘We have listened to people, we are in a good place now’. 

Most economists and think tanks think tax rises in the Autumn Budget 2025 are now inevitable. 

Tom Waters, an associate director at IFS, said: ‘These changes more than halve the saving of the package of reforms as a whole, making the Chancellor’s already difficult Budget balancing act that much harder. 

‘The decision is to protect existing health-related benefit claimants from the reforms, thereby making the savings entirely from new claimants to these benefits. 

‘This will create big differences – thousands of pounds a year, for many years in some cases – between similar people with similar health conditions who happen to have applied at a slightly different time.’ 

Samuel Mather-Holgate, an independent financial adviser at Mather and Murray Financial told Newspage: ‘With Starmer doing more U-turns than someone doing the bleep test, taxes are going up. 

‘There’s no way that other departments can mitigate these changes to their budget.’

Which taxes could be increased? 

Reeves has ruled out taxes on the working people, including income tax, National Insurance for employees, VAT and corporation tax. Other taxes will be in her sights. 

Capital gains tax 

Higher capital gains tax could be one option for Reeves. 

Capital gains tax is levied on profits from assets ranging from shares to second homes, buy-to-let properties and personal possessions.

The rates for stocks and shares gains were hiked in the 2024 Autumn Budget to 18 per cent for basic rate taxpayers and to 24 per cent for those paying higher rates of tax.

The profits from assets like sharers tend to come from people taking a risk, whether an entrepreneurial one or an investment one, making capital gains tax a likely target for hikes. 

Inheritance tax

Reeves could have inheritance tax in her sights again

It is a growing money-spinner for the government, with the number of households falling in scope for it rising.  

In the 2024 Autumn Budget, Reeves capped the availability of Business Relief and Agricultural Relief, and halved the relief available on Alternative Investment Market shares.

Reeves also unveiled plans to bring pensions into the scope of inheritance tax from 2027.  Further tweaks and amendments could happen. 

Pensions

Pensions are a major source of wealth for many people, making them a prime target for Reeves. 

Last year, while Reeves dragged unused pension assets into the inheritance tax net from April 2027, she did not go as far as some experts feared. 

That is not to say that she will not meddle with pensions later this year. 

HMRC recently announced a consultation on salary sacrifice – when people forgo a pay rise or bonus and add to their pension instead, which helps avoid higher marginal tax rates.

It has prompted speculation that Reeves could introduce a cap on the amount of salary sacrifice people can use.

There is also speculation about the reintroduction of the pensions lifetime allowance.

The Chancellor could also look at reforming income tax relief on pension contributions.

Tax thresholds freeze

The freeze on certain tax thresholds since 2021 has created a huge stealth tax raid in recent years.

The frozen basic rate threshold, currently £12,570, drags more people into paying income tax and means that the real value – adjusted for inflation – of the tax-free allowance has been diminished.

Stalling the higher rate threshold at £50,270 has shifted more people and a greater slice of earnings into the 40 per cent bracket.

John Woolfitt, a director at Atlantic Capital Markets, told Newspage: ‘A “stealth tax” manoeuvre will be high on the cards. 

‘Income tax allowance and the higher-rate threshold currently rise with inflation. Freezing or delaying future increases effectively raises income tax, without officially having to announce a hike.’

He added: ‘Targeting high earners and wealth transfers could also be seen and a populist move as the government tries to sure up support from the broader electorate.’ 

According to the Resolution Foundation, extending the freeze in personal tax threshold by one year will save £4billion a year, ‘though further consolidation is likely to be needed in the Budget this Autumn.’

Property

Further tax changes linked to buying and selling property could be introduced. 

Last year, Reeves introduced a 2 per cent increase to stamp duty for second home owners. 

Future stamp duty hikes could target owners of multiple properties or high-value property transactions.

Businesses 

Higher employer national insurance contributions are already hammering businesses across Britain.

However, under growing pressure to boost the Treasury’s coffers, Reeves could set her signs on corporation taxes, VAT exemptions or other duties. 

‘This would really impact the already fragile business confidence in the UK’, Woolfitt said. 

Wealth tax

Some campaigners believe Reeves should impose a wealth tax to boost the tax-take and quash inequality. 

Tax Justice UK is calling on more taxes for the super-rich to be introduced by the current Government.

It wants to see a 2 per cent wealth tax on assets over £10million, which it says will raise up to £24 billion a year. 

It also wants to apply national insurance to investment income, close inheritance tax and non-dom loopholes, and introduce a 4 per cent tax on share buybacks.

It remains unclear whether a wealth tax is on Reeves’ agenda and how it would work in practice. 

An unprecedented 16,500 wealthy Britons are predicted to leave this year amid higher taxes and a gloomy economic outlook.