Spending Review heralds tax rises on the way, but where?

The Chancellor's 2025 three-year spending review is set against £40bn in tax rises and £30bn extra borrowing in last year's Autumn Budget, continued low economic growth, a rising tax burden and increasing welfare spending. With new spending commitments laid out, including a restored winter fuel allowance, tax rises in this year's Autumn Budget appear inevitable, but where will those rises appear?

The national debt is almost 100% of GDP and tax revenues as a share of GDP are nearing 38%, or a 70-year high. With such high debt, the government is paying out around £105bn per year in debt interest. That is about twice the spending on defence.

The October 2024 budget, with its National Insurance rises, new inheritance tax proposals and large increase in the National Minimum Wage, impacted consumer and business confidence, affecting UK growth prospects and resulting in growth being less than the Chancellor's own projections (the economy shrank by 0.3% in April). Without growth, the Chancellor's spending plans are stymied, leading to more tax rises and more borrowing. 

With inflation at 3.4% for April and May continuing to be higher than the Bank of England's 2% target, further interest rate reductions are probably some way off - a further cost to businesses and borrowers.

See also our other articles:

• Spending Review: impact for South West businesses
• Spending Review: what it means for housing associations

Key spending announcements:

• NHS spending to increase by an extra £29bn a year with no apparent reforms (leaving other departments facing cuts)
• The core schools budget will increase by more than £4.5bn a year.
• £22.5bn investment in research and development by 2029 (previously 2027) (details to follow)
• 2.3% growth in spending over government departments in real terms (but not unprotected departments)
• Nuclear power: A £30bn spending commitment, including £14.2 billion to build Sizewell C and £2.5bn in small modular reactors.
• Defence spending to rise to 2.6% of GDP by 2027 (but now includes the intelligence services)
• £15bn for public transport projects in England’s city regions, a four-year funding for Transport for London. and £445m for Welsh rail upgrades.
• Increased spending on Border Force
• Further investment in carbon capture plants
• Securing a future for British Steel by ensuring orders for new infrastructure, including rail
• £39bn investment over ten years for new social and affordable housing
• The Treasury’s rule book will be amended so that all UK regions are treated fairly when it comes to funding decisions.
• Additional funding to support up to 350 communities, especially those in the most deprived areas.
• Police spending power will increase by an average of 2.3% (to be paid for via increased council tax?)
• £3 bus fair cap extended until at least March 2027
• Warm Homes plan funding extended
• New funding for school building refurbishments
• £2bn investment in AI
• A further £500m investment in HMRC's digital services to make it a "digital first" organisation.
• £1.7bn over four years for HMRC to fund an additional 5,500 compliance and 2,400 debt management staff.
• The mortgage guarantee scheme that was meant to end on 30 June 2025 will, from 1 July, become a permanent scheme.

It has to be said that some of these spending promises are not for the immediate future, but are set for future years when Chancellor Reeves will no longer be in the Treasury. So, some of today's announcements may never actually come to pass.

It should also be noted that the Chancellor may face more pressures on spending with public sector pay disputes on the horizon. Resolving such disputes will either require more borrowing or more taxation.

Taxes

There is an old saying that Chancellors have a shovel for every corner; there is no place or transaction that cannot be taxed. George Osborne was a regular proponent of finding new taxes

And if the current Chancellor sticks to her pre-election pledge of no increases in income tax, employee national insurance and VAT, then that shovel has to dig deeper into the pockets of individuals and businesses in more new ways to fund the government's spending commitments.

Deputy Prime Minister Angela Rayner, in a recently leaked document, suggested where that shovel may go with yet more tax rises on businesses and individuals, bringing in a suggested extra £4bn a year. How many of her ideas will the Chancellor take on board?

Those ideas included:

• reinstating the pensions lifetime allowance
• Increasing taxes on dividends to level up with income tax rates and removing the dividends allowance
• remove inheritance tax from AIM shares
• closing commercial property stamp duty loopholes
• raising the corporation tax bank surcharge to 5%
• increasing the rates of Annual Tax on Enveloped Dwellings (ATED)
• freezing the additional rate income tax threshold beyond 2028

We also know that the Chancellor has launched an inquiry into workplace pension schemes to see if money could be released for public investment. This could also include removing the valuable tax/NIC relief under salary sacrifice schemes for pension contributions.

Also on the horizon are likely large rises in council tax (to pay for the police budget) and further freezes to tax allowances and thresholds.

A summer of speculation now awaits to work out where the Chancellor will venture with tax rises in the Autumn Budget, on top of the recent NIC increases and the planned changes to inheritance tax.  On top of that, employers still await the final details of the Employment Rights Bill currently making its way through Parliament to give employees day-one rights. Such uncertainty means many businesses will hold off from making investments in jobs or projects until the autumn.

Contact us

If you would like to discuss how recent or possible future tax changes could impact you or your business, contact a member of our tax team, or your usual Bishop Fleming contact.

[Gary Mackley-Smith]