What lies beyond the Spring Statement?

In a twist of the famous Pavlov’s dogs experiment, taxpayers may be feeling conditioned to dread the words ‘fiscal headroom’, in particular, a potential lack of it. Its mere mention could cause some nervousness among taxpayers as they anticipate being softened up for a subsequent one-two of spending cuts and tax rises.

It is clearly not a position the Chancellor wants to find herself in, seemingly stuck in a Treasury more akin to a temple of doom with an ever-reducing fiscal ceiling. The only routes out currently appear to be digging down with cuts or propping up with tax receipts.

There is some reprieve for taxpayers as it seems that tax rises are off the agenda at this Spring Statement. This could ultimately prove to be short-lived however, with the UK’s future finances somewhat dependent on the outcome of global events. What then might lie in store for taxpayers later in the year if the Chancellor needs to look at tax changes again?

Reversing the National Insurance cuts

There would be a reluctance to break the manifesto pledges on tax rises, but the risk of breaching the government’s fiscal rules might ultimately force Rachel Reeves’ hand. One route the Chancellor could explore is to reverse the National Insurance contributions cuts that were introduced by her predecessor. It’s been proven that such changes can be implemented quickly and could raise additional revenues for the Treasury in a matter of months if required. Some might reasonably challenge however that if this route were to be followed, it should have featured in the Autumn 2024 Budget.

Extending fiscal drag

A more obvious tax lever for the Chancellor to pull would be to extend the freezing of thresholds and allowances for another couple of years. It has been reported that this could potentially a year for the Exchequer in the future and would buy much needed time for the Chancellor to get the economy growing before the impact was truly felt by taxpayers. There is therefore the possibility that such a measure allows the Chancellor to meet her fiscal rules in the short term and could then be reversed in the future if the economy improves.

Reducing the cash ISA allowance

A reduction in the limit for cash individual savings accounts (ISAs), potentially from £20,000 to £4,000 per year, is reportedly being considered by the Treasury. This could potentially occur as soon as 6 April 2026.

Changing IHT rules for gifts

Following the inheritance tax (IHT) changes announced in the Autumn 2024 Budget, many taxpayers have started to focus on the possibility of making gifts to other family members during their lifetime.

Ordinarily, if an individual gifts an asset to another person (other than their spouse or civil partner), that gift may still be subject to IHT if the donor does not survive the gift by seven years. The obligation to pay such an IHT charge falls on the recipient of the gift in the first instance. One of the reasons IHT can be seen as “unfair” is because those who have made gifts during their lifetime may pay no tax at all, whilst others who do not appreciate how the rules work may find their estates face a significant tax bill.

One change the government could announce in response to this could be to extend the period that someone needs to survive a gift from seven years to, say, 10 years. That would bring more families into the IHT tax net and unwary recipients of gifts may find themselves with a tax bill in due course.

Pension tax reliefs

The Chancellor may also be tempted to make further changes to the rules on pensions, particularly in relation to tax relief on pension contributions. Of the five most costly ‘non-structural’ tax reliefs (broadly tax reliefs designed to advance economic and social objectives), two of them relate to pension contributions.

A persistent rumour ahead of any budget or fiscal statement in recent years has been that the Chancellor on the day may cut the income tax relief available to higher earners making pension contributions. A further change that may also be considered is the relief that employers and workers can benefit from in relation to National Insurance contributions (NICs) when pension contributions are made via salary sacrifice. It is likely that any changes to pension tax reliefs would require consultation and are unlikely to be introduced immediately.

New taxes

A wildcard option for the Chancellor would be to introduce entirely new taxes to generate additional revenues for the Exchequer. There has been an increase in calls to introduce a wealth tax, which the in the past. An alternative approach may be to dust off the short-lived health and social care levy and introduce a similar tax earmarked for the NHS or social care that operates in a similar way to income tax and NICs. That would provide a more certain tax revenue stream than a wealth tax, as it would spread the tax take across a larger proportion of the population, but a hard sell to taxpayers may be required to justify it.

Ultimately, when it comes to raising further tax revenues, the Chancellor may need to call upon her acclaimed chess playing skills and think two moves ahead. She is navigating a board fraught with danger, with limited moves available given all the major revenue raising taxes appear to be out of play.