Rachel Reeves is being warned she may have to unleash a £40billion tax grab in next month’s Budget to stop Britain’s finances spiralling out of control.
City analysts have dubbed it a “repair job Budget”, as the Chancellor tries to find billions to meet her own fiscal rules – without breaking Labour’s pledge not to raise taxes on “working people”.
According to a new report from merchant bank Berenberg, the Office for Budget Responsibility is expected to downgrade its growth forecasts sharply – turning a predicted £9.9bn surplus into a £27bn deficit by 2029–30.
That leaves Reeves facing a £37bn hole, even before she allows for any extra spending.
Some economists now believe she may need to raise or save up to £50bn to restore what the bank called a “wafer-thin” £10bn margin of safety, however this has been rejected by the Chancellor.
A Berenberg note said: “Having raised state spending to its highest level since the Second World War outside of recessions, the Labour Government now plans to restrain it so that it declines as a share of GDP.
“We expect the OBR to predict that the Government would miss its fiscal target by £27bn without remedial action.”
To fill the gap, the bank listed ten possible tax raids that could net around £44bn, plus a further £3bn from welfare reform.
Ten tax grabs Reeves could be eyeing
1. Income tax and NI freeze extended again – £10bn
The easiest but most politically explosive option would be to extend the freeze on income tax and National Insurance thresholds to 2030. The freeze has already dragged 4.1million people into higher bands since 2022. Extending it would raise around £10billion, but be seen as another stealth tax on middle earners.
2. New bank windfall levy – £6bn
Reeves could copy Margaret Thatcher’s 1981 deposit tax by hitting lenders’ reserves held at the Bank of England. These reserves ballooned under quantitative easing, and a levy could raise up to £6–8billion a year. Banks are already braced for a raid after months of political pressure to “pay their fair share”.
3. Council tax overhaul – £5bn
Council tax is still based on 1991 property values, meaning owners of modest homes often pay proportionately more than those in mansions. Revaluing homes or adding new bands could hand the Treasury a £5billion windfall, though it risks uproar from millions of homeowners.
4. Capital gains at death scrapped – £4bn
Under current rules, the value of assets is “reset” when someone dies, wiping out capital gains. Abolishing this relief would mean heirs must pay tax on any increase in value built up over a lifetime. Economists say the change could net £4billion, though critics call it a “death tax by the back door”.
5. Small business tax relief axed – £3bn
Currently, firms making less than £50,000 a year pay a lower 19% corporation tax. Scrapping this “small profits rate” and equalising business tax at 25% would raise about £3billion but spark fury among entrepreneurs, many already struggling with higher costs and sluggish growth.
6. Dividend tax hike – £2bn
Shareholders currently pay 8.75% tax on dividends above £500 if they are basic-rate taxpayers. Raising the rate to 16.5% could bring in £2billion, hitting pensioners and small investors who rely on dividends for income. Critics say it would penalise those who “did the right thing and saved”.
7. VAT trap for small firms – £2bn
Businesses only start charging VAT once their turnover exceeds £90,000. Lowering that threshold could pull thousands more small traders into the net. The move would bring in about £2billion, but would pile extra red tape on struggling shopkeepers and sole traders.
8. Higher National Insurance for self-employed – £2bn
Freelancers currently pay 2% NI on profits above £50,270. Raising this to 8% could generate £2billion. It would be sold as “fairness” with employed workers, but unions warn it risks punishing people who took the risk of working for themselves.
9. Gambling duty hike – £1bn
A long-shot revenue raiser would be to increase tax on online casinos and betting firms. Boosting Remote Gaming Duty from 21% to 50% could yield £1billion. Former PM Gordon Brown has championed such a move, saying gambling companies should help fund child poverty initiatives.
10. Two-point income tax shift – £6bn
A clever but controversial option would be to raise income tax by 2% while cutting National Insurance by 2%. On paper, working people would pay no more – but pensioners, landlords and the self-employed would all lose out. The Treasury could pocket around £6billion a year from the tweak.
Extending the freeze on income tax and National Insurance thresholds would be the simplest but most politically explosive option. The freeze has already dragged 4.1 million more people into higher tax bands since 2022 – a stealth rise that has fuelled criticism that Reeves is “taxing by the back door”.
Other measures could hit homeowners, investors and small firms, from a shake-up of council tax and capital gains to bringing more small businesses into the VAT net.
A new windfall-style levy on banks is also on the table, inspired by a 1980s Thatcher measure and designed to claw back some of the billions made on central bank reserves during the era of quantitative easing.
The report adds that Reeves could try to close the gap with a second round of welfare reforms worth around £3bn, after scaling back earlier plans to save £5.5bn amid backbench revolt.
Despite the mounting speculation, the Treasury takes the line that it will not comment on be drawn on “Budget speculation”. It has advised Brits not to take decisions about their finances based on the speculation.