Treasury Scrambles for Revenue as £40bn Shortfall Signals Inevitable Tax Rises

 "This is the moment for anyone with UK assets to stop waiting and start acting.”

“When governments feel cornered, they move fast. We’re talking about very real, very targeted moves on people with portfolios, pensions, business assets and property. We are entering a higher-tax era,”

The likelihood of tax rises in the upcoming Autumn 2025 Budget is increasing, with experts warning that Chancellor Rachel Reeves faces a £41.2 billion fiscal gap that will be hard to close without additional revenue.

The National Institute of Economic and Social Research (NIESR) has said Reeves must raise taxes to meet her borrowing rules, suggesting “a moderate but sustained increase in taxes” alongside reforms to council tax, VAT and pension allowances. It also indicated that extending the freeze in income tax thresholds beyond 2028 could help boost revenues.

Economic weakness is a key factor. GDP contracted in April and May, and government borrowing reached £20.7 billion in June – the second-highest June figure on record – despite higher tax receipts. Debt interest payments were also at near-record levels. Reeves has pledged to reduce debt as a share of GDP by 2029/30 and avoid borrowing for day-to-day spending, but the collapse of her £10 billion ‘fiscal headroom’ into a £41 billion shortfall leaves few options other than spending cuts or tax rises.

Several tax areas are under scrutiny:

Capital and Investment Income

Nigel Green, CEO of deVere Group, warns that the UK is heading towards inevitable tax increases, particularly in areas such as capital gains tax, dividend income, inheritance tax (IHT) thresholds, and so-called “wealth loopholes.” According to Green, the economic reality is grim: growth remains sluggish, government borrowing has reached its limits, and Labour has locked itself into costly spending commitments alongside strict fiscal rules. This combination, he argues, leaves the Treasury with few alternatives beyond tax hikes, spending cuts, or a combination of both. Green stresses that individuals with significant UK assets should not wait for the Budget to act. “The Treasury can be expected to go after capital, property, and investment income — because that’s where the money is,” he said, signalling that asset-heavy individuals and business owners are likely to be key targets for revenue-raising measures.

Difficulty Cutting Spending

Richard Carter of Quilter Cheviot highlights another key challenge: the government’s difficulty in reducing public spending. Recent political and economic events, he notes, have shown just how hard it is to deliver meaningful spending cuts without severe political backlash or damaging essential services. As a result, speculation is growing over which taxes could be increased to fill the widening fiscal gap. In Carter’s view, this inability to trim spending meaningfully means the pressure is squarely on the revenue side of the ledger — making some form of tax increase in the October Budget far more likely.

Threshold Freeze

One measure already under quiet discussion is the possibility of extending the freeze on income tax thresholds beyond its current 2028 end date. Such a move would boost government revenues through “fiscal drag” — where wage inflation pushes more people into higher tax bands — without the political optics of an explicit tax rate increase. However, critics warn that this would effectively break Labour’s manifesto pledge not to raise income tax for “working people,” since more workers would pay higher rates over time. For SMEs, this could mean reduced disposable income for customers and higher PAYE obligations as staff salaries naturally rise into higher bands.

Salary Sacrifice and Pensions

Reports have also surfaced suggesting that the Treasury may explore changes to salary sacrifice rules and pension tax relief — both of which are currently popular ways for employees and business owners to reduce taxable income and maximise retirement savings. While these adjustments could generate additional revenue, experts warn they would be politically and operationally complex to implement. Laith Khalaf of AJ Bell has urged the government to commit to a “pensions tax lock” to give savers confidence that long-term retirement planning will not be undermined by sudden policy shifts. Any changes in this area would require careful handling to avoid damaging trust in the pension system.

Inheritance Tax

Inheritance tax remains a politically sensitive subject but is still a potential target for reform. Rachel Reeves could consider tightening the rules around gifting or taper relief in an effort to close perceived loopholes and increase revenue from wealth transfers. However, experts note that while such reforms could improve fairness and close avoidance routes, they would likely generate only modest sums in the short term. Nonetheless, even small changes to IHT could have a meaningful impact on estate planning for family business owners and high-net-worth individuals.

Wealth Tax

Finally, the prospect of a UK wealth tax remains a live, if contentious, topic of discussion. Advocates see it as a way to address wealth inequality and raise substantial revenues from the richest households, but critics argue it would be difficult to administer and enforce effectively. Stuart Adam of the Institute for Fiscal Studies has warned that “it is difficult to make the case that an annual tax on wealth would be a sensible part of the tax system even in principle,” pointing to the logistical challenge of creating a new administrative system capable of valuing all forms of wealth accurately. While politically risky, the option is unlikely to disappear from the conversation, particularly as the government searches for new ways to fund its commitments.

With limited political scope to raise the main working taxes, the Autumn 2025 Budget is likely to target capital, wealth, and investment income. As Nigel Green warns: “When governments feel cornered, they move fast. We’re talking about very real, very targeted moves on people with portfolios, pensions, business assets and property. We are entering a higher-tax era,”

Government To Target Inheritance Tax & CGT to Fill £40bn Gap

The Treasury is preparing significant reforms to inheritance tax (IHT) and is also reviewing capital gains tax (CGT) ahead of the Autumn Budget, as it searches for ways to close a £40bn+ deficit. Proposals under consideration could limit long-standing tax planning opportunities, particularly for SME owners with wealth tied up in business assets, property, and pensions.

IHT Reform on the Horizon

Officials are examining ways to raise more revenue from IHT, including:

• A lifetime cap on gifting – restricting the value of assets that can be given away during a person’s lifetime without triggering IHT.
• Changes to the seven-year gifting rule – which currently exempts gifts made more than seven years before death, with taper relief for gifts made three to seven years before death.
• Review of taper rates – potentially reducing the current sliding scale that lowers tax over time.

“With so much wealth stored in assets like houses that have shot up in value, we have to find ways to better tap into the inheritances of those who can afford to contribute more,” a Treasury source told The Guardian.

For SME owners, these changes could hit hard. Many rely on the ability to gift assets – whether business shares, property, or investments – as part of their succession and tax planning. If reforms are announced in the Autumn Budget, options to transfer wealth tax-efficiently could narrow overnight.

CGT Also Under Review

Alongside IHT, the Treasury is weighing increases to CGT rates – potentially moving them closer to income tax levels – to capture more revenue from asset sales. This could have major implications for SME owners looking to sell part or all of a business, as well as those realising gains on property or investments.

Officials are reportedly considering:

• Small rate rises – while keeping rates lower than income tax to avoid discouraging investment.
• Targeted reliefs – such as a CGT allowance for those reinvesting in UK businesses.
• Reform of Business Asset Disposal Relief – potentially reducing the tax benefits available when selling a trading business.

Any rise in CGT rates could be introduced with little notice, leaving those with planned disposals facing a significantly higher tax bill if they delay.

The Clock is Ticking

From April 2027, unused pension pots and death benefits will also fall within IHT scope – a sign of the Treasury’s determination to tax more inherited wealth. Combined with potential caps on gifting, changes to taper relief, and higher CGT rates, the Autumn Budget could reshape estate and exit planning.

For SME owners, acting before these changes are announced is critical. By implementing a trust structure now, or completing planned disposals ahead of a CGT rise, you can lock in current, more favourable rules and protect your wealth for the next generation.

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