Budget 2025 predictions: ‘Almost anything is possible’

Sara White, Editor, Business & Accountancy Daily. Croner-i

Croner-i tax experts Glyn Fullelove, Sarah Kay and Martin Jackson talk to Sara White about what they expect in the Budget on 26 November from why the chancellor needs to make radical reform to the tax system, may have to break the pledge and must avoid salami slicing approach which will only wind up businesses and taxpayers.

From business taxes to income tax and national insurance, tricky election pledges, VAT thresholds and fuel duty hikes, to radical reform of the tax system. we look at the different options facing the chancellor Rachel Reeves on 26 November.

On business taxes, Glyn Fullelove, lead technical writer at Croner-i and former president of the Chartered Institute of Taxation (CIOT), said: ‘In terms of corporation tax it’s not that long ago since it was put back up to 25% by the previous chancellor or previous chancellor by two or three, I can’t quite remember how many.

‘Over the last 10 to 15 years we have seen so many changes to business taxes. It’s actually quite hard to see where the government could go if it wanted to raise more money from larger companies.

‘And, of course, smaller companies are still really up in arms about the increases in employer national insurance last year. Given that that has soured relations between business as a whole, including much smaller businesses and the government, I think it may well be that Rachel Reeves decides that business taxes is not a place to go this time.

‘To raise money we might see something more fundamental in reforming business rates or other taxes related to property.

‘I think it’s a Budget where almost anything is possible so I may be wrong, that they may actually want to go and raise some more money from large businesses but I think the difficulties are no obvious avenues, but maybe we will see steps towards some larger reforms in some other areas.’

The pre-election pledge not to raise income tax and National Insurance on working people is really under pressure. Obviously, the government has a pledge not to raise the three big taxes - income tax, NICs and VAT on ‘working people’.

Sara White, editor of Business & Accountancy Daily said: ‘In a sense that’s caught the chancellor in quite a tricky vice for raising substantial amounts of money. But the previous government reduced national insurance for employees shortly before the election. So that was a 4% cut, which arguably means the government could look at reintroducing that 4% or looking at that level in some way?’

Watch the full discussion on B&ADTV HERE

Martin Jackson, employment tax expert at Croner-i, said: ‘The government is hamstrung to some extent by that pledge. We all think and more or less all of us we were talking about this off air, we all think really if they were going to break that pledge they should have broken it straight away when they first came into power rather than now where it's going to create even more political mayhem than it would have done then.’

Jackson said there are options for the chancellor. ‘In order to keep the pledge they could increase the rate of basic income tax with a corresponding reduction in national insurance so that working people, in inverted commas, would see no difference at all because what we paid extra in tax would be offset by what we saved in National Insurance.

‘Other people would pay more in tax, not working people, such as landlords for example because the income tax net is much broader than the national insurance net. National insurance is only paid by people who are working whereas income tax is paid by anybody who’s got income. So there is that possibility that that’s a way of playing with the tax system keeping the pledge but actually raising tax.

We could broaden out National Insurance to other forms of income in the same way that income tax is. That’s not increasing the tax for working people, again it’s increasing it for everybody else.

Although of course lots of working people are landlords and might have to pay more national insurance but wouldn’t be paying more on their work. So we’re dancing on the head of a pen slightly, but it’s a possibility. So those are two things that occur to me that sort of keep the pledge.’

This raises questions about the impact on pensioners, and highlights how tweaking the income tax NI ratio would raise a significant amount of money.

‘It would raise quite a sizeable amount of money,’ said Martin, but Fullelove added: ‘You talk about working people because National Insurance is capped at a certain level so yes that’s true… not everybody would get back the additional income tax from a cut in national insurance.’

‘The things that we really need to do are the things that are going to be politically very difficult to do,’ Fullelove said. ‘We're trying to think of ways where she could raise more money but not break the pledge. I think ultimately if she really wants to raise, what do we think she needs to raise? £40bn is what she'd like to raise. Then we don’t see that there’s really much option but to break that pledge.’

Sarah Kay, VAT expert and lead technical writer at Croner-i agreed: ‘And breaking the pledge openly and honestly is politically slightly easier to achieve than bending it by doing some of the things that you’re talking about, which is not going with the spirit of the pledge even though you might technically be the right side.’

Martin added: ‘You’re talking about being honest and coming up front and saying, the country needs this money. Someone's going to have to pay it. And I completely agree.’

Away from the income tax and working people dilemma, Fullelove wants to see the chancellor revisit the controversial farming tax decision to slash agricultural property relief, citing the influential Centax report by Warwick University.

‘There's a lot of unrest amongst the farming community and I think she might well rethink the limit on agricultural relief and possibly think about putting it up maybe to £3m to £5m.

‘There are routes that if you increase the limit for relief then, if you go beyond that limit of relief, you take away some of the remaining exemptions, with the remaining discount you can raise the same amount of money but protect the vast majority of family farms.’

‘So you set the limit at say £5m but once you go above £5m you pay inheritance tax on the whole of the amount above £5m not at the reduced rate of 40% and not at a reduced rate of 20%. That seems to be gaining some traction.’

On the third so-called ‘protected’ tax pledge, Kay said there are plenty of ways for the chancellor to revisit VAT rates.

‘The options for the chancellor in terms of revenue raising with VAT is increasing the standard rate. It would raise substantial sums. But on the flip side, it is inflationary. And we are due to have one of the highest inflation rates in the G7 countries. So the government will probably want to avoid that.’

The threshold is another contentious issue, but making a major change would be quite a radical departure.

‘Moving the VAT registration threshold, there is ongoing debate about whether our £90,000 VAT registration threshold is appropriate.

‘The debate broadly divides into people who would decrease it to an extremely low level such that every business is bought into the VAT net. And there are also people who think we should just whack it up to something like, you know, half a million pounds or something such that only very big businesses pay it.

‘Whether either of those options would raise significant amounts of money is, I think, open to question.’

VAT is notoriously complex and Kay argued for simplification of the different rates.

‘Rachel Rees does have options around that. She could abolish some of the reduced rates of VAT,’ said Kay. ‘Whilst I am sort of politically in favour of broadening the tax base, I think if she’s going to broaden the base, it has to be done in a more comprehensive way. I think that targeting particular categories of expenditure is a poor decision.

‘If we want to raise a lot of money for the nation, I think it should be spread a little bit more evenly rather than targeting specific niche spenders.’

Fuel duty has been frozen for years, so could this go up finally?

‘Outside of VAT, we have a whole suite of excise duties. Fuel duty could go up. The last, I think, two Budgets ago, it went down. That decrease is due to finish next March. I suspect she will get rid of that. That’s a relatively easy win. But again, hydrocarbon oil duty only brings in £24bn pounds a year, which is not a huge amount in the grand scheme of things.’

With net zero targets this is even more critical, and 2050 being only one generation away, White said ‘we are going to need to accept a totally changed environment. So surely, bite the bullet and increase fuel duty by 10p.

Kay said: ‘Constantly, effectively reducing fuel duty in terms of inflation means that we’re just treading water rather than making a decision that this is where we’re going in the future. Yes, increase it now, I’m quite keen on our net zero targets. I think it is a good thing to look after the planet.

‘You can offset that by giving tax incentives to more sort of green behaviours, electric vehicles, zero emission vehicles pay a bit less vehicle excise duty. There are moves to even it out as electric vehicles become more popular. But, yeah, again, we're talking about relatively small amounts of money. This is behaviour modification for the national good rather than actually sorting out our nation’s balance sheet.’

But regardless of the deicisions the chancellor takes later this month, our panel unanimously agreed that the tax system needs a radical overhaul, creaking under complexity with HMRC struggling to deal with the day-to-day workload and customer service levels still not at levels expected by the public, accountants and tax agents.

‘The time is probably here for a chancellor who is prepared to stand up and actually make some proper structural long needed structural changes to the tax system,' said Kay. 'That might not be quite so politically difficult if she was prepared to stand up and be honest about it and just make it clear.

‘These are changes that are going to have to be made if we want the services that we’ve all come to expect then they're going to have to be paid for and there is no easy way to do this. We can tinker around the edges with all sorts of little tweaks here and there that we’ve been talking about but what we really need is a massive chunk of money and that's going to need radical change.’

On a final note, White asked for views on a wealth tax, which raised an interesting debate. Although there was scepticism about how effective this would be and whether it would raise money quickly enough to the fill the hole in the finances, it was not shut down as an idea.

Fullelove said: ‘They have been tried in many countries and they are difficult to administer. You always have this issue about what do you do with a person who has got large amounts of assets, and not a huge amount of cash. And do you levy it on things like pensions? Do you levy it on private residences?’

For Kay it would only work as part of a radical reform agenda. ‘There are a lot of things that people say we should do. I think the wealth tax falls into that category of 'it sounds like a tax that will hit somebody else, not me, and therefore it should be done. But in the end it won't raise a lot and it's very difficult to do,' she said.

‘The countries where they work don't tend to have capital gains tax or inheritance tax. And so, you know, we already tax wealth in those ways, and it comes back to talking about whether Rachel Reeves can be a big reforming chancellor.

‘A wealth tax would have to be implemented as part of a wider reform, a strategic view of how we tax things in this country. It can’t just come in as a one off. This is our new tax that’s going to solve everything, and these sort of other people are going to pay it.’