Committed to holding only one fiscal event per year, the Chancellor will have been hoping that her first Spring Statement on 26 March would be relatively straightforward.
However, 2025 has brought with it global developments that have created uncertainty and weakened growth. These factors, combined with a poor economic environment, high inflation, and mounting pressure from UK businesses following unpopular proposals announced in her Autumn Budget, may see the Chancellor having to backtrack on key tax reforms that she had intended to help stabilise the UK economy.
In order to not break her own fiscal rules and as widely reported, the Chancellor is likely to rely on spending cuts to raise additional funds, rather than announcing further tax rises.
But with little flexibility and experts warning that spending cuts alone won’t fully address the fiscal black hole in public finances, does the Chancellor have room for manoeuvre with tax?
Below, we look at the potential areas of tax policy that the Chancellor could revisit and reconsider, in order to incentivise investment by people and businesses, to help boost the economy.
Business rates review
Business rates have been the subject of debate for many years, and the government agrees that further reform is needed, stating in the Autumn Budget 2024 their intention to launch “a fairer business rates system”.
Changes announced in the Budget included a reduction in the level of retail, hospitality and leisure (RHL) business rates relief (which had been due to end on 31 March 2025), from 75% to 40% (capped at £110,000) from April 2025. This was clearly a blow for struggling retailers. The increase in employers NI, low consumer confidence and the increase in the minimum wage has also exacerbated the situation.
We are already seeing a number of store closures and expansion plans being put on hold. The Government is engaging with interested parties and stakeholders to consider reform of the current system. It acknowledges that a minority of businesses abuse the current system and as a result, is consulting on adopting a General Anti Avoidance Rule (GAAR) for business rates in England. Consultation closes in March 2025.
Thresholds and allowances
Despite pledging not to raise taxes for working people, or the headline rate of income tax, national insurance or VAT, and under (not uncommon) political technicalities they could still hold true to this statement by changing thresholds. Slight changes here would raise considerable amounts of tax. It’s worth noting that between Income Taxes, National Insurance, VAT and Corporation Tax, this accounts for around two thirds of public sector receipts. Labour wouldn’t be popular by using such technicalities, but slight changes to these (along with wage inflation which should increase Income and NI tax raises) could be seen as an option.
Cash ISAs reform
Rumours abound that the Chancellor has Cash ISAs in her sights for reform in the Spring Statement. This may include reducing the allowance to £4,000, or even scrapping it all together. The Chancellor may hope is that by reducing the allowance, she can persuade savers to invest instead and so boost the economy. However, figures from the HMRC don’t appear to support this – data shows that two thirds of Cash ISA savers contribute no more than £5,000.
- What can savers do instead? The Government is using this as a push to get Briton’s investing, but that isn’t always appropriate if the cash you hold is an emergency fund. On top of an emergency fund, longer-term investments could be placed in Stocks & Shares ISAs (though capital is at risk, and with a current annual allowance of £20,000), or those that are Higher or Additional Rate taxpayers may look towards the attractive tax position of Government Gilts if looking to limit risk.
- What can the government do instead? The tax treatment of ISAs is actually far more generous than what individuals in many other countries receive, and the Government is right to encourage people to look for above inflation returns with investments where objectives are longer term. There are plenty of ways to hold savings and invest tax efficiently (though this won’t always mean paying no tax), but being aware of these comes down to consumer knowledge, and the Government could do more to support the Financial Advice sector.
Scrapping Cash ISAs all together and instead giving a more generous allowance to savings interest that can be earned tax free would allow the Government to discourage someone saving £100,000s in cash ISAs paying no tax rather than investing. However, it would not be punitive to people that have a cash fund of £25,000 as a couple and may at present be paying tax if higher rate taxpayers and not held in ISAs, who are trying to put together a house deposit.
Contrary to this, the Government would do well to remember that funds in the bank are being fed back into the economy, allowing people to mortgage and businesses to borrow, and constraining this could have adverse effects.
This change may mean a shift in your financial planning. However, as with any tax change such as this, it is easy to misinterpret the guidance related to your individual circumstances. We encourage you to seek professional advice to develop adaptive financial plans to cope with any planned amendments to tax legislation.
Further pensions reforms
As part of the changes in the Autumn Budget, pensions are to be brought into the Inheritance Tax Regime. All assets will now be a flat rate of 40% over IHT thresholds from 2027, in-line with IHT. Given this doesn’t take effect until 2027, the big question is if IHT will be levied on an unused pension and then beneficiaries will potentially pay income tax on the pension subsequently received, is it still worthwhile contributing to a pension?
We would say that funding a pension scheme is still tax efficient, but the problem is that people may start to question the viability of doing so. The Government still needs to make pensions a viable option for people to save for retirement and be encouraged to do so.
Previous changes to Pensions have come with the ability to apply for protection to maintain existing rules, given individuals are contributing to an agreed contract. That isn’t to say changes can’t be made, but doing so would not be simple.
Further reforms that may be more feasible could include reducing the tax free lump sum but perhaps with some grandfathering, or changes to Pension tax-relief on contributions moving forward.
We would say that funding a pension scheme is still tax efficient, but the problem is that people may start to question the viability of doing so. The Government still needs to make pensions a viable option for people to save for retirement and be encouraged to do so.
Inheritance Tax reforms
Key reforms to Inheritance Tax were announced in the Autumn Budget 2024:
- Changes to Agricultural Property Relief (APR) and Business Property Relief (BPR).
- Inclusion of unused pensions within the scope of Inheritance Tax (IHT).
A Government consultation is ongoing until 23 April 2025 on these measures. Whilst it is unlikely that the above changes will be amended as a result of the consultation, IHT could be one to watch out for, in terms of further reforms in the Spring Statement.
UK Non-Domicile Regime
"New rules announced in 2024 will impose UK inheritance tax on worldwide assets for those individuals who are long-term residents of the UK – this applies not only while the taxpayer remains in the UK but also for ten years after their departure. To avoid being caught by the new ten-year tail, currently non-domiciled residents who may have acquired a deemed domicile in the UK have until April 2025 to become non-UK resident (or rather, ensure they are not UK resident in 2025/26). Delaying their departure by just one year can prolong their UK inheritance tax exposure by seven years."
"This is likely to most significantly impact those elderly non-doms who believe they will survive until 6 April 2028 but may not survive until 6 April 2035, and therefore they now have a strong incentive to leave the UK within the next few months.
It is interesting to note that in 2018, Japan repealed a similar inheritance tax tail on former residents just one year after it had been introduced. Could the Chancellor have a similar change of heart?"
Cost to employ and creating growth
Following the Autumn Budget, UK companies faced a triple whammy of a rise in NICs, a significant jump in the statutory minimum wage (impacting some employers) and no prospect of a cut in corporate tax during this parliament.
Clearly the Government were hoping that the public would understand that the fiscal gap had to be filled somehow, and as tax advisers we see why the NIC increase for business was chosen to do much of the heavy lifting in terms of revenue raising - it’s relatively easy to introduce and is likely accepted by many as the least bad option.
But this big increase in the cost of employing people and creating new jobs sits uneasily with the laudable government focus on long-term economic growth and is likely to give potential future investors’ concerns about coming to the UK.
Corporate Tax Roadmap
Whilst welcome, the Corporate Tax Roadmap released in 2024 did not provide any significant incentives to boost the corporate sector. It did, however, promise to deliver several consultations, notably on transfer pricing simplification and a new process to give investors in major projects increased certainty around the tax treatment of their investments. We hope that these consultations will be released as part of Spring Statement and that the government will also release the long anticipated Industrial Strategy, which we hope will complement the Corporate Tax Roadmap and provide further certainty for business.
Global tax compliance
The Corporate Tax roadmap contains an intention to consult on a number of transfer-pricing matters, including lowering the threshold for exemption and removing UK-UK transfer pricing.
In applying an SME exemption, the UK is not currently internationally aligned from a threshold perspective so lowering the threshold to protect the UK’s tax base would not appear unreasonable, notwithstanding the additional compliance costs which may result. Brexit has given the UK the opportunity to remove UK- UK transfer pricing which in practice is broadly tax neutral, so removing it would reduce the compliance burden of having to comply with the TP rules where there is little or no tax risk.
One has to question whether the Government is doing enough to encourage the investment needed to create growth - little was announced in the Autumn Budget in the way of further incentives to choose the UK as a place of business, making it a missed opportunity to put the UK in a much more internationally competitive position
Carried interest
Announced changes to the taxation of carried interest in the Autumn Budget came as no surprise, having been referenced in the Labour Party manifesto and wholesale reform is on the agenda. The most immediate change is an increase in the headline rate of capital gains tax applicable to carry, from 28% to 32% for carried interest arising from 6 April 2025. However, from April 2026, a new regime is proposed which brings carry into the income tax regime, regardless of the underlying character of the return.
"A technical consultation on the reform of carried interest ended in January 2025 and draft legislation is now awaited. As part of the consultation, consideration was given to the need for further conditions in order for carry to be deemed ‘qualifying’ and able to benefit from the revised regime. It appears that existing fund structures will not be excluded from the new regime, but transitional provisions may help to mitigate the position."
MHA can help you navigate the ever-evolving tax landscape
The Spring Statement 2025 may bring additional wide-ranging impacts on industries and businesses across the UK. Our tax experts and industry specialists will be happy to help you adapt and reassess your financial plans in the light of any tax cuts and legislative changes arising from these fiscal announcements.
Contact your usual MHA adviser or your nearest office for guidance on the measures announced or to discuss other tax matters, and we will be happy to assist with any queries.
