All the tax changes that could come at Budget – and how likely they are

It is expected that there will be several tax hikes announced when Chancellor John Healey unveils his Budget on Wednesday. Analysis by KPMG suggests that soaring borrowing costs could cut the government’s fiscal headroom – the buffer it has under its own borrowing rules – from £23.6bn to about £12bn. Though it may not need to restore all of the lost fiscal space, the expectation is it will want to up taxes at least by a little, in order to calm financial markets. Shorts At the same time, the government may want to sweeten the public in the form of a tax cut. So what could the government do? We look at the options below, and how likely they are. Tax rises on banks Healey previously called banks part of “the crown jewels” of the UK economy, but multiple reports now suggest he could raise taxes on the sector. Former Conservative chancellor Jeremy Hunt reduced a surcharge that banks pay on corporation tax, from 8 per cent to 3 per cent, back in 2023. It came at the same time that headline corporation tax – a tax on UK company profits – rose from 19 per cent to 25 per cent. One option is a reversal of that surcharge cut – which would raise about £2bn. Another option is to increase a tax called the bank levy – a tax on money that a bank owes to its customers and other banks. A downside of this tax rise is that it could result in higher mortgage rates or lower savings rates, as banks try and recoup some of their extra costs. But experts expect this to be limited. Robert Webb, a professor of banking and applied economics at Stirling University said: “Taxing banks is a decent idea and should not affect consumers.” Likelihood rating: 4.5 out of 5. With numerous taxes ruled out, the Chancellor has few places to turn. Taxing banks is unlikely to cause a backlash with voters. Gambling tax increase Healey is under pressure from some think-tanks – including the Social Market Foundation (SMF) – to increase taxes on gambling firms. The foundation has proposed doubling Machine Games Duty on some slot machines, fruit machines, and quiz machines to 40 per cent. The tax is calculated on takings – the cash put into the machines minus payouts. The SMF suggests the tax could increase revenue by between £275 and £458m. Likelihood rating: 4 out of 5. As with the banks, this is one of the few areas Healey can go to raise funds without being accused of adding to the cost of living. Mansion tax threshold drop In last year’s Budget, then-chancellor Rachel Reeves announced that there’d be an extra tax worth between £2,500 and £7,500 a year on properties worth more than £2m. Officially called the High Value Council Tax Surcharge (HVCTS), but dubbed as a “mansion tax”, it was expected to hit about 134,000 homes. It is due to begin from April 2028. Reports this year suggest the government is now considering extending the charge to properties worth more than £1.5m, doubling the number of homes affected to 271,000. Likelihood rating: 2 out of 5. Reports have suggested the Chancellor has ruled this out, not least because it would hit many ordinary families in London where a three or four-bedroom house can be valued at this. Capital gains tax hike Capital gains tax (CGT) is paid on the profits made from the sale of assets such as second homes and shares. It currently sits at 18 per cent for basic-rate income taxpayers and 24 per cent for higher and additional-rate taxpayers. Several Labour figures, such as the First Secretary of State Louise Haigh and Defence Secretary Wes Streeting, have previously supported raising CGT to create a closer balance between taxes on income and wealth. But after previous suggestions that a rise could be in the offing, The i Paper now understands Treasury officials believe the current tax rates are at the optimum levels for generating revenue. Likelihood rating: 1 out of 5. A change looks unlikely. The tax is currently said to be set at its optimum level, after which returns dip as people hold on to assets rather than sell and pay a large amount of tax. Personal allowance hike The personal allowance – the amount people can earn before paying income tax – has been frozen at £12,570 since 2021, and the freeze was extended to 2031 by former chancellor Rachel Reeves at last year’s Budget. This creates a so-called “stealth tax” as salaries grow to keep up with inflation, causing workers to pay more in income tax and national insurance (NI) over time. This will continue unless a change is made in the Budget on 28 October. Some in Westminster now believe there could be a surprise change on Wednesday. In particular, reports this weekend have suggested there could be changes made for some pensioners. The full state pension is expected to rise by £489 to £13,036 next April, which is above the £12,570 personal allowance threshold – meaning more pensioners living on the state pension alone could face tax bills. The government has pledged that such pensioners will be exempt from tax, but has yet to say how. There is an expectation that Healey could announce a rise in the personal allowance for low-income pensioners to £13,036, meaning they would not pay tax. The exact mechanics of how this would work are not yet clear. Likelihood rating – Personal Allowance rise for everyone: 2.5 out of 5. It’s not impossible, despite the estimated £800m cost per £100 uptick (according to the Institute for Fiscal Studies). It would be sold as a tax cut, and resolve the pensioner tax issue. Tax returns are increasing generally because of fiscal drag. Likelihood rating – separate tax bracket for pensioners: 4 out of 5. The more likely option. A clean way of keeping the promise to state pensioners. Fuel duty hike delay Since 2022, there has been a temporary 5p cut to fuel duty in place, which has been extended multiple times. It is due to end on 1 January 2027, with a planned 3p per litre increase and another 2p increase on 1 March 2027. But there is a chance that Burnham could delay the planned increase from January, especially as fuel costs are at such high levels. Likelihood rating: 3.5 out of 5: The planned increase will have been factored into long term financial forecasts. But it is not a good look for a government concerned about the cost of living.