Budget 2025: IFS Sets Out Its Budget Plan
The influential Institute for Fiscal Studies (IFS) has issued a pragmatic summary of the Chancellor’s tax increase options ahead of November’s budget together with recommendations. The key findings as they may relate to retirees and those in later life are as follows:
Tax revenue as a share of national income is set to reach a UK record high of 37.4% in 2026/27
However, the IFS does go on to say that this tax share is lower than in many other Western European countries. The implication being that it would be feasible for the Chancellor to raise more tax revenue if desired.
Raising the rates of Income Tax, National Insurance contributions (NICs) or VAT – the three largest taxes – could straightforwardly raise large sums.
Together the trio of taxes above raise about two thirds of all revenue, but any change to them risks breaking Labour’s manifesto promise not to “increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”. For the record – and underlining the government’s self-imposed constraint – the IFS estimates that by 2029/30:
a. Increasing all rates of income tax by one percentage point would yield £10.9bn a year.
b. Increasing individual (i.e. employee and self-employed) and employer rates of NICs by one percentage point would yield £14.5bn a year.
c. Increasing the main rate of VAT by one percentage point would yield £9.9bn a year.
In common with other think tanks, the IFS says that extending the ongoing freeze in personal tax thresholds would also raise a significant amount (£10.4bn a year by 2029/30).
Restricting income tax relief on pension contributions would raise large sums but should be avoided.
The IFS believes it would be unfair to restrict up-front relief but continue to tax pension income at the taxpayer’s marginal rate. The IFS’s preferred options for increasing tax on pensions include:
a. Levying some NICs on employer pension contributions
b. Reforming the 25% pension tax-free lump sum
Raising significantly more revenue from the next four largest taxes
Namely, corporation tax, council tax, business rates and fuel duties. However, this would also bring challenges. An increase in corporation tax would go against the Government’s own roadmap, whilst for council tax and fuel duties, the OBR is already forecasting significant increases.
There is however still talk of a doubling of English council tax for bands G and H (4% of all properties) which would raise £4.2bn by 2029/30. For business rates, the IFS has reiterated its call for serious reform in the guise of a land value tax for commercial property.
Simply raising tax rates on income from capital – including rental income, dividends, interest and self-employment profits – could raise money but would discourage saving and investment.
The IFS returns to the plea it has made in earlier reports for ‘genuine reform’ rather than more revenue-motivated tinkering. It wants to see improvement to the design of the tax base (entailing some giveaways) and closer alignment of overall tax rates across different forms of income and gains. In this respect it echoes comments from many other think tanks.
An annual wealth tax would face huge practical challenges.
The IFS is no fan of a wealth tax, believing it would also penalise saving and, the more it was concentrated on the very wealthy, the more it would incentivise them to leave (or not come to) the UK.
A better solution in the IFS’s view would be well-functioning taxes on capital income and gains. This would include, for example, abolishing CGT rebasing on death (worth £2.3bn a year by 2029/30, the IFS estimates).
The Chancellor should not increase stamp duties
The SDLT argument the Conservative proposals for limited abolition.
The IFS is blunt that “it would be difficult, but not impossible, for the Chancellor to raise tens of billions of pounds more revenue without breaking Labour’s manifesto promise(s)”. In its view, “just because large sums could be raised elsewhere does not mean it would be sensible...[as]… many of the tax-raising options outside the ‘big three’ would have particularly damaging effects on growth and welfare.”
The IFS see this Budget as an opportunity for the Chancellor to grasp the nettle of tax reform, with property and capital taxes both good places to start. However, its arguably more realistic request is that “at a minimum, the Chancellor should avoid measures that worsen the design of the tax system.”
In the lead up to the Budget on 26th November we will be providing insightful commentary and advice for those in later life. This can be best accessed reviewing our regular blog articles and commentary on the Harold Stephens website and social media channels. Search for ‘Harold Stephens IFA’ on You Tube and subscribe to the channel to get the very latest videos direct from Richard Higgs, later life financial planning specialist.
Finally, register and reserve your place at one of our 2 post-budget Later Life Financial Planning live events to be held on Wednesday December 3rd 2025 by emailing office@haroldstephens.co.uk.