Economy and public finances
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Tax

Call of duties

Revenue and reform for Autumn Budget 2025

Adam Corlett
Adam Corlett

The upcoming Budget is likely to come with a significant downgrade to the fiscal outlook, with pressures from recent policy reversals, rising debt-interest costs, and a gloomier economic outlook. It is plausible that annual borrowing could be £20-£40 billion, or more, above the Office for Budget Responsibility’s March forecast.

This is undoubtedly a challenging outlook for the Government, but it’s one that it must respond to robustly, so this report considers how tax policy can be used to address the expected shortfall. It sets out a range of options that could together raise over £30 billion, while minimising the economic impact of higher taxes on the economy and living standards. It recommends a strategic approach to reforming the UK’s often-distortionary £1 trillion tax system: supporting fair competition between firms; removing biases against workers; and aligning taxes with social and environmental goals. Designed well, this Budget could simultaneously provide fiscal reassurance, a meaningful Child Poverty Strategy, and long-lasting beneficial tax reform.

Key findings

  • The Government could plausibly be facing a fiscal gap of £20-£40 billion a year at the Autum Budget. Increasing borrowing would come with risks, and there are significant challenges associated with using spending as the main lever to address the shortfall.
  • So tax must play a key role. Increasing revenues in this way generally comes at the cost of lower growth and living standards. The job for the Government then is minimise those impacts while trying to maximise potential positives.
  • We focus on tax system reforms that increase efficiency while protecting employees as far as possible. This can be achieved by providing a clear tax strategy that puts the system on an improving path and also reinforces other policy goals, including boosting fiscal credibility.

Recommendations

  • Arbitrary tax differences across businesses should be reduced, to support productivity growth via fair competition. The small business tax gap needs to be brought back down; the VAT threshold should be greatly reduced; partners in Limited Liability Partnerships at least should be asked to pay an equivalent of employer National insurance; and pension salary sacrifice should be dialled down.
  • Some personal taxes will need to rise, but this can be done while largely protecting employees given existing unfair and distortionary tax differences. A 2p rise in Income Tax rates, while also reducing employee National Insurance by 2p would deliver a range of tax system improvements, while also raising £6 billion from those income sources that benefit from the different coverage of the two taxes. In the fiscal circumstances, the personal tax threshold freeze should also be extended for a further two years. Meanwhile, the basic rate of dividend tax should rise, and loopholes in the Capital Gains Tax system that particularly benefit the extremely wealthy should be closed.
  • Additional revenue could be raised through reasonable taxes on harms, for a greener and healthier country, while trying to avoid sustaining high inflation in the short-term. The Fuel Duty freeze needs to end and we suggest a more credible new uprating regime to facilitate that; VED should be reformed for future sales, including a weight and mileage link for electric vehicles; carbon pricing should be broadened; gambling duties streamlined; and a Sugar and Salt Reformulation Tax introduced.
  • Together these measures could raise over £30 billion in 2029-30 – with directions of travel for going further if needed – while boosting fiscal credibility in additional ways and allowing inflation and interest rates to come down.

Further reading

Call of duties
Revenue and reform for Autumn Budget 2025
·
Adam Corlett
A healthy State?
Putting the 2025 Spending Review into context
·
Camron Aref-Adib, Mike Brewer, Tom Clark, Alex Clegg, Adam Corlett, Ruth Curtice, Emily Fry, Zachary Leather, Charlie McCurdy, Felicia Odamtten, Simon Pittaway, James Smith, Greg Thwaites
Mission impossible?
Five things to look out for at next week’s pivotal Spending Review
·
Ruth Curtice, James Smith

https://doi.org/10.63492/urc611

Adam Corlett
Adam Corlett Principal Economist